May 2014 Pension Finance Update

Pension sponsors treaded water in May, with both assets and liabilities edging up in tandem for both ‘model’ plans we track[1]. Our traditional ‘Plan A’ remains down 5% during 2014, while the more conservative ‘Plan B’ is down 2% on the year.


Stocks moved ahead during May. The S&P 500 gained more than 3%, the NASDAQ was up more than 2%, the overseas EAFE index earned 2% and the small-cap Russell 2000 added 1%

Year-to-date, the S&P 500 is up 5%, the EAFE index is ahead more than 4%, the NASDAQ has earned more than 1%, and Russell 2000 is down 2%.

A diversified stock portfolio gained 2% last month and is now up 3% so far in 2014.

Interest rates continued their 2014 downward trend in May, which is good news for bond investors. Both Treasury and corporate bonds enjoyed gains of more than 1% during April. For the year, bond funds have returned 3%-6%, with long duration bonds seeing the best results.

Overall, our traditional 60/40 portfolio earned 1%-2% last month and is now up 3% so far this year, while a conservative 20/80 portfolio added 1% during April and is now up 5% during 2014.


Both funding and accounting liabilities are now driven by market interest rates. The graph on the left compares Treasury STRIPs yields at December 31, 2013, and May 31, 2014, while the graph on the right charts the movement of PPA “2nd and 3rd segment rates” since December 2011 (May 2014 estimated). While these rates don’t strictly meet GAAP measurement requirements, we think they are a very good resource for understanding “rule of thumb” discount rates for plans:


Interest rates declined another 0.1% or so during April, continuing a ‘flattening’ trend this year that has seen rates drop by more than 0.5%. As the graph above shows, short term (1-5 year) rates are almost unchanged, while long-term (10 year+) rates are down by about 0.7%. Credit spreads remain stable, so we are seeing similar behavior among corporate bond yields. As a result, pension liabilities increased almost 2% during April and are now 7%-9% higher than at the end of 2013, with long-duration plans seeing the biggest increases.


An optimist might feel that pensions have weathered a storm (literally, given the winter) over the past few months. Funded ratios have declined this year, eroding some of the improvement of 2013. But interest rates driven in part by low realized and expected inflation, have pushed back down toward the record lows of 2012, and the stock market is holding firm in the face of extraordinary Fed policy.

The graphs below summarize the behavior of assets and liabilities for our two model plans so far in 2014:


Looking Ahead

As we discuss in our 2013 article MAP-21 and DB plan finance – Looking ahead to 2014, pension funding requirements over the next few years will not be significantly affected by changes in interest rates. So, from a cash perspective, required contributions for 2014 and 2015 will not be much affected by rate fluctuations.

After climbing about 1% in 2013, rates have moved back down more than 0.5% so far early 2014. Rates remain low by historical standards, with most sponsors using rates below 5% to measure pension liabilities for accounting purposes.

The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2014, along with estimates for 2015. Pre-MAP-21 rates, both 24-month averages and December ‘spot’ rates, which are still required for some calculations, such as PBGC premiums, are also included.



October Three, LLC is a full service actuarial, consulting and technology firm that is a leading force behind the reemergence of defined benefit plans across the country. A primary focus of the consultants at October Three is the design and administration of comprehensive retirement benefits to employees that minimize the financial risks and volatility concerns employers face.

Through effective plan design strategies October Three believes successful financial outcomes are achievable for employers and employees alike. A critical element of those strategies is ReDB plan design. ReDB plans represent an entirely new, design-based approach to retirement and to the management of both the employer’s and the employee’s financial risk, focusing on maximizing financial efficiency and employee value.

For more information:

233 S. Wacker Drive, Suite 4620
Chicago, IL 60606
[email protected]
Phone: 312-878-2440
Fax: 866-945-9697
Contact Us


[1] Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a cash balance plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds. For both plans, we assume the plan is 100% funded at the beginning of the year and ignore benefit accruals, contributions and benefit payments in order to isolate the financial performance of plan assets versus liabilities.

Read more commentaries by October Three Consulting