Findley Davies has updated the Pension IndicatorTM tool based on market conditions through May 31, 2013. This tool was developed 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-month change as of May 31, 2013, based on the investment mix and plan type.
The Pension IndicatorTM is updated on a monthly basis to reflect changing marketing conditions, so return regularly for the most recent values and updated commentary.
|
Calendar Year-to-Date Investment Mix (Equity / Fixed Income) |
||||
| Plan Type |
80/20 |
60/40 |
40/60 |
20/80 |
|
Frozen (for several years) |
15.6% |
12.1% |
8.6% |
5.0% |
|
Recently Frozen |
17.5% |
13.9% |
10.3% |
6.7% |
|
Ongoing Traditional |
19.8% |
16.1% |
12.5% |
8.8% |
|
Cash Balance |
16.3% |
12.7% |
9.1% |
5.6% |
|
Month-over-Month Investment Mix (Equity / Fixed Income) |
||||
| Plan Type |
80/20 |
60/40 |
40/60 |
20/80 |
|
Frozen (for several years) |
5.5% |
4.4% |
3.3% |
2.2% |
|
Recently Frozen |
7.2% |
6.1% |
5.0% |
3.9% |
|
Ongoing Traditional |
9.2% |
8.1% |
6.9% |
5.8% |
|
Cash Balance |
6.1% |
5.0% |
3.9% |
2.8% |
|
12-Month Change Investment Mix (Equity / Fixed Income) |
||||
| Plan Type |
80/20 |
60/40 |
40/60 |
20/80 |
|
Frozen (for several years) |
23.8% |
18.6% |
13.41% |
8.2% |
|
Recently Frozen |
24.9% |
19.7% |
14.4% |
9.2% |
|
Ongoing Traditional |
26.4% |
21.1% |
15.8% |
10.4% |
|
Cash Balance |
24.0% |
18.8% |
13.6% |
8.4% |
Commentary
The last few years have heralded the lowest interest rates in a couple of generations all over the industrialized world -- with the US being no exception, indeed taking the lead. The US benchmark interest rate, set by the Federal Reserve, seems to have found a home at 0.25% since late 2008. Compare that rate to the average US benchmark rate over the last 40 years of over 6% and you wouldn’t be alone in expecting rates to go right back up. With the Fed continuing its quantitative easing program in May, though, it has managed to keep the overnight rates at these generationally low levels.
On the other hand, the Fed doesn’t control longer-term rates as effectively. The rates for longer-term treasuries are influenced by expectations of future inflation among other factors. In recent months and years, how long the Fed is expected to continue its asset-purchase program has become a major factor. Now, finally, in May, some experts have started seeing signs that the economy may at long last be on the rebound, meaning that the Fed may finally start to back off the monetary stimulus and that would have an impact on interest rates.
May was the kind of month we have been hoping for and talking about for quite a while now. Although we’ve been talking about such a month, we’ve been consistently rebuffed by the market, in the past. Interest rates finally rose in May enough to lower pension liabilities and improve the funded status of many a plan. Is this a flash-in-the-pan or a harbinger of things to come?
If you have any comments or suggestions for further improvements, we would welcome your feedback.
Contact Findley Davies to discuss this information further.
© 2013 Findley Davies, Inc.
About the Findley Davies Pension IndicatorTM
Findley Davies 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, however, 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 .
© 2013 Findley Davies, Inc.
