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PrintOct 14, 2009
Stocks, generally, have advanced steadily every month since the March trough. Concurrently, there’s been a steady downward movement in corporate bond yields. In pension finance terms, what stocks have given, interest rate movements have taken away, pushing pension assets and liabilities alike higher without significantly affecting funded ratios.
The drumbeat of rising stocks and declining interest rates continued in September. Other than a pause in June, stocks have now advanced steadily every month since the March trough. These movements have been mirrored by a steady downward movement in corporate bond yields during the same period. In pension finance terms, what stocks have given, interest rate movements have taken away, pushing pension assets and liabilities alike higher without significantly affecting funded ratios.
Assets
Again in September, all flavors of equities gained a healthy 3-6%. On the year, large cap US stocks are now up close to 20%, with small-cap, tech, and overseas shares doing better, up by as much as 30%.
Bonds added another 1-4% during the month, continuing the recent pattern. Corporate issues and longer maturities did best, on the strength of modest declines in Treasury yields, modest flattening at the long end of the curve, and continued tightening of credit spreads during the month. For the year, high quality corporate bonds are up 10-15%, but Treasuries remain down, especially at longer maturities.
Overall, the traditional 60/40 pension portfolio is likely up 13-17% on the year through September. Those who rebalanced into equities in early 2009 are enjoying the best results.
Liabilities
Both funding and accounting liabilities are now driven by high quality corporate bond yields. The chart below compares the J.P. Morgan Aa Yield Curve at December 31, 2008 and September 30, 2009:
Overall, rates have come down significantly at most maturities, with the most pronounced movements at the short end of the curve. Overall, we expect discount rates for short duration plans to be about 1.00% lower than at 12/31/2008, while, for a duration 12 plan, we estimate effective rates to be perhaps 0.50% lower than what was used at 12/31/2008.
So, a typical pension plan has likely seen an increase in liabilities of 10-13% this year, with shorter duration plans seeing the biggest increases.
Looking ahead
Through three quarters, pension plans have weathered 2009 with little change in funded status due to asset returns and interest rates. A typical 60/40 portfolio continues to track liability changes fairly well this year, with negative asset returns early in the year offset by rising interest rates, and the reverse since mid-March, with healthy asset returns negated by declining interest rates.
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