For many of us in the retirement industry, 2018 will be a year to forget. What started off with such promise, as the S&P 500 was up about 6% by January 26th, has deteriorated into being one of the worst years for pension funding in quite some time. In addition to the positive equity start to the year, interest rates were going to ratchet higher, and fast. For pension liabilities marked-to-market, higher rates would mean that the present value of those liabilities would fall, further improving funding. Wow, what happened?
Well, the 6% start to the year for the S&P 500 has evaporated, as the fourth quarter has been a disaster (-14.4% in the last 3 months). The S&P 500, despite the post-Christmas rally, is now down -6.7% (as of 12/28). Worse, smaller capitalization stocks and international securities, especially emerging markets, have performed quite poorly generating losses that are significantly greater than those of large-cap U.S. stocks.
The rising U.S. interest rate environment, which was predicted to be swift and painful, had the 10-year U.S. Treasury yield hitting 3.24% in early November. However, as equities took a hit, the flight to safety and fears about economic growth have combined to drive the 10-year rate to 2.75%, which is only 29 bps above where it began at the start of the year. So, liability growth this year is modest, but that doesn’t help much given that the asset-side of the equation has been so weak.
Another missed opportunity for our retirement industry and the participants that rely so heavily on our ability to help deliver on the promises made be plan sponsors was the failure of Congress’s Joint Select Committee on Solvency of Multiemployer Pension Plans to create legislation that would have protected the pensions for roughly 114 Critical and Declining multiemployer plans covering more than 1 million participants. The continuing delay in addressing this crisis will only create a more tenuous situation. The committee was supposed to have produced legislation by November 30th. That deadline came and went with the “promise” that negotiations/conversations would continue. There has been radio silence since then.
Lastly, we continue to live with pension funding volatility because most public and multiemployer plans continue to focus exclusively on the return on asset assumption as the only objective for a pension plan. As we’ve stated so many times, the primary objective should be that plan’s liabilities (promise) and it is the current funded status that should drive asset allocation decisions. If plans had been more liability focused, there is a very good chance that assets would have been shifted from the growth portfolio to the cash-flow matching portfolio earlier in the year, which would have protected assets and the funded status as the markets turned negative. When will we learn?