Pension Index Sees Five-Year High

Capital markets were favorable on all fronts in November, according to Towers Watson’s monthly “Pension Finance Watch” report.

The latest report shows positive equity returns and increasing interest rates produced a 2.1% increase in the Towers Watson Pension Index. The index value has increased almost 24% for the year to 77.1, a level not seen since October 2008, says Towers Watson.

The report also notes that in terms of investment returns, equity portfolios returned 2.7% in November. Positive equity returns in nine of 11 months have increased the equity portfolio more than 28% for the year. Rising yields implied negative fixed-income returns for the month. Towers Watson also believes that long bond indexes will remain deep in negative territory for the year.

As for interest rates, long corporate yields increased in November and are up over 80 basis points for the year, according to the report. Long treasury yields increased even more, so that the credit spread (the incremental yield on long corporate vs. long government bonds) fell below 1%.

The Towers Watson Pension Index tracks the performance of a hypothetical pension plan invested in a portfolio of 60% equity and 40% fixed income. That portfolio saw a 1.4% return for November, according to the index.

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 2% and 0.8%, respectively.

The November report also notes that Towers Watson has begun to track a second version of the 60% fixed income portfolio, which incorporates longer duration fixed-income investments. That portfolio returned 0.1% for the month. It trails the shorter duration portfolios over the preceding nine- and 12-month periods, with the performance shortfall attributed to increases in long bond yields over these periods.

Pension liabilities, based on yields on high quality corporate bonds as of the measurement date, were also examined. The data shows that the related benchmark discount rate was 4.83%, which was up nine basis points for the month. In addition, a liability index, based on projected benefit obligations, decreased 0.8% in November, reflecting the increase in the discount rate.

The “Pension Finance Watch” report tracks the value of the Towers Watson Pension Index. The index examines the asset and liability performance of a hypothetical benchmark pension plan, and evaluates the capital market effects on pension plan financing.

The November release of the report can be downloaded here.