The weather in the Northeast has been seasonally mild to start 2020, but that doesn’t mean that DB pension plans haven’t had a cold start to the new year, as funded ratios have declined roughly 3%-5% in January according to October Three, a pension design firm. Both plan assets, which fell in value, and plan liabilities, which advanced as interest rates fell contributed to the steep decline in funded ratios and funded status.
This development impacted all pension plan types, but only corporate plans that use a AA Corporate blended rate (ASC 715) would actually see this in their reporting, as a majority of both public and union plans use the return on asset assumption (ROA) to value their plan’s liabilities, too. Who knows what the remainder of 2020 holds for these plans, but living with this volatility in funded status makes little sense.
As we’ve been discussing at various conferences, plans would be wise to de-risk at this time by cash flow matching near-term liabilities. This strategy serves to reduce interest rate risk, as a cash flow driven investing (CDI) approach defeases benefit payments that are future values, while extending the investing horizon for the true alpha assets (non-bonds) to outperform. Pension plans have struggled to improve funded status and stabilize contribution expenses since the great financial crisis. It would be a shame to see this effort compromised by a correction in the market and further falling interest rates.