The new year has brought some good news for private-sector defined benefit plans, according to recent reports.
Willis Towers Watson, in its Pension Index that gauges the performance of a hypothetical benchmark pension plan, says that its index had a strong start to 2021, and rose to a level it had not seen since April 2019. The factors measured by Willis Towers Watson contributed to an overall increase of 1.8% its Pension Index in January to 79.9. The investment consulting firm NEPC, which measures the performance of two hypothetical plans—a total-return plan and an LDI-focused plan—similarly reported overall growth.
It was not all sunshine. Equities performed poorly in Willis Towers Watson’s index—overall, their monthly returns in January were 0.4%; large cap stock returns fell 1%, and among fixed income funds, Treasury bonds fell 3.6% and large corporate bonds fell 3%. Only small and mid-cap stocks showed a positive return of +2.5%. NEPC similarly reported “a small pullback in equity markets.”
But there were improvements whose strength exceeded those declines. Willis Towers Watson says that yields on long high-quality corporate bond indices rose by an average of 21 basis points. Discount rates improved as well, Willis Towers Watson and NEPC both found. Milliman also reported improvement in discount rates among the 100 largest private-sector DB plans in the United States in January. More specifically, they found that the discount rate among those plans improved from 2.46% in December to 2.62% in January.
Both also report that pension liabilities fell. Willis Towers Watson says that the drop in pension obligations fell resulted in the liability implicit in its index falling 2.3%. NEPC says that liabilities for its total-return plan fell 3%, and attributed the drop to a steepening in the Treasury curve.
Funded Status
NEPC says that overall the trends in January resulted in improvement in the funded status of both the hypothetical plans it tracks; the funded status of the total-return plan improved by 2.3%, while that of the LDI-focused plan improved by 0.2%. Milliman reported an improvement in funded status among the plans it tracked of $39 billio, and a drop in the funded status deficit to $196 billion, which it says is the first time that deficit has been below $200 billion in more than a year. Milliman attributed the improvement it found in pension funded status to the improvement in the discount rate.
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