DB Plans See September Stability

September is the beginning of harvest season, but the haul was mediocre this year for private-sector pension plans, say new reports. 

More precisely, the Willis Towers Watson (WTW)  Pension Index stood at 97.0 on Sept. 30, an increase of 0.1 percentage points since the end of August. In their analysis of the two hypothetical plans they track — one that is traditionally invested and one that is invested in a more conservative manner — October Three says that the plans they track both lost less than 1% in September. 

Wall Street Woes

The indices would have fared better if it had not been for the stock market’s performance, say the analyses. WTW reported a slight improvement in their monthly pension index update that reflects the asset/liability performance of a hypothetical benchmark pension plan. That improvement would have been more robust, they say, if not for negative investment returns. October Three strikes a similar tone; they found a slight difference in the fortunes of corporate DB plans, but they report a small drop. “Pension finances slipped modestly in September,” says October Three, which tracks a hypothetical traditionally invested plan and a conservatively invested plan.[1] 

How bad was it? September was “the worst month of the year for stocks,” says October Three, reporting that “All categories of stocks fell substantially last month.” The traditional plan lost 7% during September and is now down 22% for the year, while the conservative portfolio lost 6% and is down by almost as much for the first three quarters, 21%. WTW says that the equities in its benchmark portfolio lost 9.3% in September, and that all equity asset classes declined by around that amount. Fixed income investments of that portfolio did not show the same results, but did fall by 3.8%. 

But Ameliorated

So given what happened on Wall Street, why did the firms report September results that were not bad, but a more benign mediocre?

WTW attributes the slight improvement to a drop in liabilities, which they say were almost completely wiped out by the stock market’s woes. October Three has different ideas, saying that surging interest rates would have spelled better results for the plans they track were it not for the stock market’s performance, which “more than offset” the positive effects of those rates. 

Longer Term 

Overall, says October Three, the traditionally invested plan they track still is up by almost 4% for 2022 so far, while the conservatively invested plan is down by more than 1%.

Brian Donohue, a partner at October Three, said in a press release, “Between interest rates reaching levels not seen since 2011 and stocks suffering their worst year since 2008, pension finances have actually been pretty stable this year. Pension balance sheets have shrunk around 20% on both the asset and liability side, but overall funded status has held up pretty well.”

Footnote 

[1] Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds. The firm assumes overhead expenses of 1% of plan assets per year, and that plans are 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.