The Markets July 12, 2013

Funded Status of Corporate Pensions Improves

The funded status of corporate pensions improved in June by $47 billion.
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According to the Pension Funding Index (PFI) from Milliman, Inc., the funded status of the 100 largest corporate defined benefit pension plans improved as higher interest rates reduced pension obligations and assets. The PFI funded ratio improved to 88.3%, up from 86% at the end of May.

The pensions’ deficit dropped to $179 billion from $226 billion at the end of May, as a sell-off in bonds continued and the benchmark corporate bond interest rates used to value pension liabilities rose. Declines in both the equity and fixed income markets resulted in a reduction of plan assets during June.

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The projected benefit obligation, or pension liabilities, decreased by $72 billion during June, lowering the PFI value to $1.538 trillion from $1.610 trillion at the end of May. A 33-basis-point improvement in the monthly discount rate to 4.74% for June, from 4.41% for May, drove the change.

The market value of assets decreased by $25 billion as a result of June’s investment loss of 1.71%. The PFI asset value decreased to $1.359 trillion, down from $1.384 trillion at the end of May. By comparison, Milliman research reported that the median expected investment return during 2012 was 0.60% (7.5% annualized). Despite June’s poor investment performance, assets have returned a respectable 3.53% thus far.

The Markets July 12, 2013

Pension Annuitization Attractiveness on the Rise

The Dietrich Pension Risk Transfer Index, which tracks the relative attractiveness of annuitizing pension liabilities, increased during June.
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The index showed the index value increased from 88.92 as of June 1, to 93.54 as of July 1. The 4.62 point gain was fueled by rising interest rates and pension funding levels. The index’s current annuity discount rate proxy of 3.07% increased nearly 70 basis points since May.

“We have witnessed many plan sponsors execute pension risk transfers over the last 60 days.” said Geoff Dietrich, vice president of Dietrich & Associates. On the heels of the Federal Reserve’s announcement that it may be pulling back the reins on its bond buying program later this year, plan sponsors who have been monitoring their cost to exit plan liabilities are being rewarded with favorable conditions for executing partial, and even full, transfers, he added. “Plan sponsors are taking action. They’re pulling their chips off the table and cashing them in.”

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The index provides a dynamically constructed, monthly directional data-point regarding the market conditions that affect settlement costs. Higher index values indicate a reduction in the settlement cost environment. The index was designed to provide pension stakeholders a mechanism for monitoring settlement market conditions, and to support effective pension plan governance and decision making.

More information about the index can be found at https://www.dietrichassociates.com.

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