Pension Index Increases Again in December

January 7, 2014 ( – The Towers Watson Pension Index increased for the fourth consecutive month in December 2013, reaching a five-year high.

The December 2013 capital market results were mildly favorable and the 1.4% increase for the month moved the index value to 78.2, a 25.5% increase for 2013 and the largest annual increase in the five-year history of the index.

The index tracks the performance of a hypothetical pension plan invested in a portfolio with 60% equity and 40% fixed income. This portfolio recorded a 1.2% return for December and 17.2% for the full year.

The index also tracks two alternative investment portfolios with different mixes of equity and fixed income. The first, at 20% fixed income, returned 24.2% for 2013. The second, at 60% fixed income, returned 10.6% for the year.

Pension liabilities, as defined in the index, typically measure yields based on high quality corporate bonds as of the measurement date. The index’s methodology matches the corporate yields to projected cash flows, with the benchmark discount rate determined at 4.89%. This reflects an increase of six basis points for December 2013 and 93 basis points for 2013 overall.

According to Towers Watson, similar to bond prices, values for pension obligations tend to move in the opposite direction of interest rates. The Towers Watson liability index, based on projected benefit obligations, declined 0.4% in December 2013. The large increase in discount rates resulted in a reduction in liability value of 7.8% for the year.

The pension index also tracks a second version of the 60% fixed income portfolio that incorporates longer duration fixed-income investments. That portfolio returned 0.4% for December 2013. It also lags behind the shorter duration portfolios over the trailing 12-month period, with the performance shortfall attributable to increases in long-bond yields over these periods.

More information on the December index results can be found here.