Findley Davies has developed the following Pension IndicatorTM to allow employers to mitigate their risk exposure by monitoring the estimated changes to their pension plan’s funded status as it is reported for financial statement purposes under U.S. GAAP. The three tables below provide the percentage change in the funded level of the plan: year-to-date, month-over-month, and 12-months ending October 31, 2011, based on the investment mix and plan type.
The Pension IndicatorTM is updated on a monthly basis.
Calendar Year-to-Date
| Investment Mix (Equity / Fixed Income) | ||||
| Plan Type | 80/20 | 60/40 | 40/60 | 20/80 |
| Frozen (for several years) | -8.5% | -7.6% | -6.8% | -5.9% |
| Recently Frozen | -11.6% | -10.7% | -9.9% | -9.1% |
| Ongoing Traditional | -15.1% | -14.3% | -13.5% | -12.7% |
| Cash Balance | -9.4% | -8.5% | -7.7% | -6.8% |
Month-over-Month
| Investment Mix (Equity / Fixed Income) | ||||
| Plan Type | 80/20 | 60/40 | 40/60 | 20/80 |
| Frozen (for several years) | 8.2% | 6.0% | 3.9% | 1.7% |
| Recently Frozen | 8.3% | 6.2% | 4.0% | 1.9% |
| Ongoing Traditional | 8.5% | 6.4% | 4.2% | 2.0% |
| Cash Balance | 8.2% | 6.1% | 3.9% | 1.8% |
12-Month Change
| Investment Mix (Equity / Fixed Income) | ||||
| Plan Type | 80/20 | 60/40 | 40/60 | 20/80 |
| Frozen (for several years) | 1.6% | 1.0% | 0.3% | -0.4% |
| Recently Frozen | -2.5% | -3.1% | -3.7% | -4.4% |
| Ongoing Traditional | -7.3% | -7.9% | -8.5% | -9.2% |
| Cash Balance | 0.9% | 0.2% | -0.5% | -1.1% |
Commentary
At long last, a break in the trend line of the Pension Indicator after three straight months of funded ratios hurtling down a deadly decline. It does not take an insider’s knowledge of pension plans to understand what happened this past month. With the yield curve and corresponding bond prices virtually identical to last month, the surge in improvement of the balance sheet values came entirely from solid equity performance during October. On a year-to-date basis, traditional equity-heavy investment strategies still continue to trail liability-driven investment (LDI) approaches, but the gap between the various investment strategies narrowed considerably during the month.The other interesting observation from this month is the stark difference in the 12-month performance of the Pension Indicator for the "Ongoing" plan versus all the other plan designs. As pointed out last month, the flattening of the yield curve during the last 12 months has hurt ongoing plans the most, because they have the longest liability tails.
As we start down the homestretch of 2011, we could use a nice bump up in the yield curve in November and December along the lines of the spike we saw in equity prices of October to get us back somewhere close to "even" for the full year. At some point, interest rates have to make a move upwards, given the fiscal and monetary policies of the last many years. Truth-be-told, it doesn’t look like the natural forces of economics are about to assert themselves anytime soon – although assert themselves they eventually will.
If you have any comments or suggestions for further improvements, we welcome your feedback.
© 2011 Findley Davies, Inc.About the Findley Davies Pension IndicatorTM
Findley Davies, Inc. has developed this indicator to allow employers to monitor the estimated changes to their pension plan’s funded status as it is reported for financial statement purposes under U.S. GAAP.
Example 1: If the market value of the pension plan’s assets as of December 31, previous year, was $90 million and the projected benefit obligation as of the same date, December 31, previous year, was $100 million, the funded plan percentage was 90%. If the year-to-date Pension IndicatorTM is +6%, the current estimated funded plan percentage would now be 106% of 90%, or 95.4%*. Similarly, if the year-to-date Pension IndicatorTM is -7%, the current estimated funded plan percentage would be 93% of 90%, or 83.7%*.
Example 2: Assuming that the funded plan percentage as of the last day of the previous month was estimated to be 90%, then if the monthly Pension IndicatorTM is +2%, the current estimated funded plan percentage would now be 102% of 90%, or 91.8%*. Similarly, if the monthly Pension IndicatorTM is -1%, the current estimated funded plan percentage would be 99% of 90%, or 89.1%*.
* All other factors and variables holding steady.
The Findley Davies Pension IndicatorTM is the property of Findley Davies, Inc. Use of the Pension IndicatorTM is not restricted if proper attribution to Findley Davies is made. Its use should be limited for estimation purposes only and Findley Davies does not assume any liability for its use or misuse by any other person not authorized by and acting on behalf of the Firm.
Additional Information and Disclaimers
The development of the liabilities is done using a yield curve analysis. Benefits due to be paid in the next 12-24 months are matched with high-quality bonds of the same duration. Each 12-month period is likewise matched up with similarly-situated bonds. Payments from the pension plan 30 years and beyond are all discounted using 30-year bond yields. Each pension plan has its own unique cash flow and can differ significantly from the results presented herein. This e-mail address is being protected from spambots. You need JavaScript enabled to view it if you are interested in an analysis of your pension or retiree medical plan.
The asset return is developed using total return statistics from readily-available indicators for both equity and fixed income instruments. A weighted-average of the equity and fixed income returns are then used for the differing ratios presented. Due to the numerous different investment choices/styles/managers, your plan’s performance may differ significantly from the results presented here.
Contributions to the pension plan are assumed to be equal to the benefits being earned in the current year. As such, the funded level of the plan is unaffected by this factor in the analysis. The funded status would, of course, be impacted by higher or lower actual contribution amounts.
The cash flows from the non-cash balance plans assume no lump sum payments are available to participants. The cash balance plan assumes 100% of participants will elect a lump sum benefit at termination of employment.
Analysis for the cash balance plan does not assume a change in the underlying interest crediting rate for employees. Analysis of spreads between corporate bonds and U.S. Treasuries is beyond the scope of this indicator. This e-mail address is being protected from spambots. You need JavaScript enabled to view it if you would like further analysis of your cash balance plan.
This indicator is an informative tool to help analyze the change in funded status for pension plans. However, the Other Comprehensive Income (OCI) line item is also affected to the extent actual return differs from expected return used in the development of pension expense. If you have any questions on the change in your OCI as a result of market conditions, This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
© 2011 Findley Davies, Inc.