June Brings Rebound for Pension Index
Strong equity returns and a slight increase in bond yields were factors in moving the index up in June, says Towers Watson. While the June increase reverses a three-month decline in funded status, the index remains down 4% for 2014.
With investment returns, the equity portfolio for the index’s hypothetical benchmark pension plan returned 2.4% in June and is up 6.5% for the year to date. Yield decreases thus far in 2014 have resulted in stronger fixed-income returns.
For interest rates, long yields increased slightly in June, but remain down about 50 basis points for the year. The credit spread (also known as the incremental yield on long corporate versus long government bonds) remains in the typical range of 90 to 100 basis points.
The index’s hypothetical DB plan is invested in a 60% equity and 40% fixed-income portfolio. That portfolio recorded a 1.4% return for June. The index also tracks two alternative investment portfolios with different mixes of equity and fixed income. Monthly returns on the 20% and 60% fixed-income portfolios were 1.9% and 1%, respectively.
Towers Watson also tracks a second version of the 60% fixed-income portfolio of the hypothetical plan, which incorporates longer duration fixed-income investments. That portfolio returned 0.9% for the month. The decrease in long bond yields so far in 2014 has made this portfolio the year’s return leader, following a lagging performance in 2013, according to Towers Watson.
The index notes that pension liabilities, as defined for U.S. accounting purposes, are typically measured based on yields on high quality corporate bonds as of the measurement date. Towers Watson uses its RATE:Link methodology, which matches those corporate yields to projected cash flows. Using this methodology, the benchmark discount rate was determined to be 4.33%, which is up two basis points for the month.
Similar to bond prices, the index notes that values for pension obligations move in the opposite direction of interest rates. Towers Watson’s liability index, which is based on projected benefit obligations, increased 0.2% for June, and reflects the net effects of interest accumulation and the increase in the discount rate.
The Towers Watson Pension Index is designed to provide an indicator of capital market effects on DB plan financing. Individual plan results vary due to factors such as portfolio composition, investment management strategy, liability characteristics and contribution policy.
More details about the June index can be found here.