Falling Bond Yields Push Model US Pension Funded Status Lower

A 7% rise in liabilities offset a 4% gain in assets during Q2.

The funded status of the model pension plan tracked by consulting firms Sibson Consulting and Segal Marco Advisors fell to 86% in the second quarter of 2019 from 88% the previous quarter as a 4% gain in assets was outpaced by a 7% increase in liabilities.

“Equities ended in positive territory both internationally and domestically. US stocks continue to outpace international stocks, and within the US, large cap outpaced small cap stocks,” Segal Marco Advisors’ David Palmerino said in a statement. “At the same time, the 10-year US Treasury yield fell substantially, perhaps indicating that the market expects the federal funds rate to decrease.”

In its quarterly review, the firms said equities followed up a very strong first quarter with a second quarter that was volatile, but still ended in positive territory on both the domestic and international fronts. During the quarter, April and June were positive months that more than compensated for the negative performance during May.

Developed market stocks outperformed emerging market stocks, however both lagged behind surging US stocks, among which large-cap stocks out-clipped small caps for the quarter, while growth beat out value for the ninth time in the last 10 quarters.

Fixed income had positive returns for the quarter both domestically and internationally, as longer-duration bonds performed particularly well. The US Federal Reserve’s Board’s Federal Open Market Committee (FOMC) left the Federal Funds Rate unchanged at its June meeting, and maintained a target range of 2.25% to 2.50%.

Meanwhile US Treasury yields fell as the 10-year US Treasury yield tumbled during the quarter to end June at 2%—its lowest level since 2016, and perhaps indicating that the market expects a rate decrease at one of the upcoming FOMC meetings.

High-quality corporate yields fell 45 basis points during the quarter, which was the net result of a 35 basis-point decrease in US nominal Treasury yields, and a 10 basis-point decrease in credit spreads. At the same time, yields dropped sharply, resulting in a slightly steeper yield curve that led to the 7% increase in the model pension plan’s liabilities.

The firms said that now is a good time for plan sponsors to examine their plan’s risk-mitigation strategy as they review their approach for the second half of 2019. 

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