Explore a real-time comparison of assets and liabilities for both a traditional pension plan and cash balance plan based on current market conditions. Our monthly snapshot provides immediate feedback as well as a look ahead for Plan Sponsors.
Pension sponsors got a boost in June, due to stock market gains and slightly higher interest rates, although both ‘model’ plans we track[1] remain modestly underwater halfway through 2014. Our traditional ‘Plan A’ gained 1% last month and is now down 4% during 2014, while the more conservative ‘Plan B’ is up fractionally in June and is down less than 2% on the 
Assets
Stocks were mostly ahead during June. The S&P 500 gained 2%, the NASDAQ was up 4%, and the small-cap Russell 2000 jumped 5%, while the overseas EAFE index dropped 1%
Year-to-date, the S&P 500 is up 7%, the NASDAQ is ahead almost 6%, the EAFE index is up 4%, and the Russell 2000 has earned 3%.
A diversified stock portfolio gained 2% last month and is now up 5% so far in 2014.
Interest rates edged up a couple basis points during June, producing flat returns for bonds of all stripes. 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% last month and is now up 4%-5% so far this year, while a conservative 20/80 portfolio gained less than 1% during June and has earned 5%-6% during the first half of 2014.
Liabilities
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 June 30, 2014, while the graph on the right charts the movement of PPA “2nd and 3rd segment rates” since December 2011 (June 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 rose a couple basis points during June, leaving pension liabilities virtually unchanged during the month. As the graph above shows, short term (1-5 year) rates are almost unchanged this year, 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 remain 7%-9% higher than at the end of 2013, with long-duration plans seeing the biggest increases.
Summary
Overall, pension sponsors have lost some ground during 2014 due to declining interest rates, which are now only about a half percent above all-time lows seen in the summer of 2012. Steady stock market performance has helped sponsors weather the storm, but in general, liability growth has outpaced asset growth so far this year.
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% in the first half of 2014. Rates remain low by historical standards, with most sponsors using rates of 4%-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.
