Pension Funded Status Heads South Again

Model of hypothetical pension's assets and liabilities indicates that the typical plan's funded status fell in Q1/2014.

A report just released by the Segal Group indicates that the funded status of the typical corporate pension plan in the United States declined from 95 percent at the end of 2013 to 92 percent at the end of Q1/2014.

During the first quarter, domestic equities (as measured by the Russell 3000) slightly outperformed international equities (as measured by the Morgan Stanley Capital International All Country World Index Ex-U.S.)—2 percent vs. 1 percent. Meanwhile, bonds (as measured by the Citigroup World Government Bond Index) bettered all stocks with a 2.66 percent gain.

The Segal Group report models the returns and funded status of a hypothetical pension plan that has a simple, passively invested asset allocation of 45 percent domestic equities, 15 percent international equities, and 40 percent global bonds. Although the hypothetical plan’s assets increased in value by 2 percent in Q1/2014, its liabilities increased by 5 percent, after declining for the previous two quarters. That’s because Q1/2014 saw a lower yield curve, due to declines in yields of around 30 percent for both high-quality corporate bonds and Treasuries. The lower yields decreased the model pension plan’s effective interest rate and, thus, increased its liabilities.

“Individual plan results will differ from this model for a host of reasons, including different funded positions, liability duration, and contribution patterns,” the Segal Group notes in its report. Nevertheless, the report advises: “Plan sponsors should examine changes in their own defined-benefit plans’ assets, liabilities, and funded ratios from the vantage point of accounting and funding metrics.”

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