Pension Outlook Weakened During April

Towers Watson says bond yields continued to decrease, while equity returns were mildly positive in April. Liability values also increased more than assets, driving the funded status decline. The average pension’s equity portfolio returned 0.3% in April and is up 2.1% for the year thus far. In addition, yield declines this year have resulted in much stronger fixed-income returns.

As for interest rates, long yields moved down about 10 basis points in April, and have now dropped more than 40 basis points for the year. The credit spread (i.e., the incremental yield on long-corporate versus long-government bonds) has been relatively stable in recent months at about 0.9%.

The Towers Watson index tracks the performance of a hypothetical pension plan invested in a 60% equity and 40% fixed-income portfolio. That portfolio recorded a 0.5% return for April. Towers Watson tracks two alternative investment portfolios with different mixes of equity and fixed income. Monthly returns on the 20% and 60% fixed-income portfolios were 0.4% and 0.6%, respectively.

Towers Watson also tracks a second version of the 60% fixed-income portfolio that incorporates longer duration fixed-income investments. That portfolio returned 1.1% for the month. The drop in long bond yields has made this portfolio the year-to-date return leader, after a lagging performance in 2013.

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. By using its RATE:Link methodology, which matches those corporate yields to projected cash flows, the benchmark discount rate was determined by Towers Watson to be 4.42%, a decrease of 11 basis points for the month.

Similar to bond prices, the index observes that values for pension obligations move in the opposite direction of interest rates. Towers Watson’s liability index (based on projected benefit obligations) increased 1.6% for April, reflecting the combined effects of interest accumulation and the decrease in the discount rate.

The Towers Watson Pension Index provides an indicator of capital market effects on pension plan financing. Individual plan results vary based on such factors as portfolio composition, investment management strategy, liability characteristics and contribution policy.

More information about the April index can be found here.