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Research

Corporate Pension Asset Values Drop for First Time in Six Months

Discount rates rise for second straight month after hitting all-time low in July.
By Michael Katz


US corporate pensions saw an investment loss of 0.74%, or $17 billion, during September—the first time in six months that their asset value has declined, according to actuarial and consulting firm Milliman.

The asset decline resulted in the average funded ratio for the 100 largest corporate defined benefit pension plans—as tracked by the Milliman 100 Pension Funding Index (PFI)—dropping to 84.5% from 85% at the end of August. The $17 billion funding decline, which lowered the funds’ aggregate market value to $1.653 trillion from $1.671 trillion, was comprised of an $8 billion increase in their deficit to $302 billion from $294 billion and a $9 billion decline in the projected benefit obligation to $1.955 trillion from $1.964 trillion.

The change in the PBO was the result of a three-basis point increase in the monthly discount rate to 2.57% from 2.54% in August. There have been two straight months of discount rate increases since July, when the rate hit its lowest point in the 20-year history of the Milliman 100 PFI.

“This was a dizzying few months for corporate pensions, with discount rates hitting historic lows while investment returns had equally noteworthy gains,” Zorast Wadia, author of the Milliman 100 PFI, said in a statement. “However, the result was a solid third quarter for the Milliman 100 plans, with the funded ratio improving.”

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Milliman also reported that during the third quarter that ended September 30, the funded status deficit for the 100 corporate pension plans improved by $18 billion. The discount rate increase and strong asset returns in August resulted in the largest monthly funded status gain for the year. And during the quarter, plan assets were up by $35 billion as the funded ratio of the Milliman 100 companies improved to 84.5% from 83.5% at the end of the second quarter.

For the 12 months to September, the cumulative asset return for the pensions was 8.15%, however, their funded status deficit has widened by $45 billion during that time because the discount rate has declined to 2.57% a year later at the end of September from 3.09% at the same time last year. During that time the funded ratio of the Milliman 100 companies has decreased to 84.5% from 86.0%.

Milliman forecast that if the 100 companies in its index were to earn the expected median asset return of 6.5%, and if the current discount rate of 2.57% were to remain unchanged through 2021, the funded status of the surveyed plans would increase to 85.3% by the end of 2020 and 89.1% by the end of 2021. This is under the assumption that 2020 and 2021 aggregate annual contributions will be $40 billion and $50 billion, respectively.

Under an optimistic forecast that incorporates interest rates rising to 2.72% by the end of 2020 and 3.32% by the end of 2021, with annual asset gains of 10.5%, Milliman said the funded ratio would increase to 88% by the end of 2020 and 103% by the end of 2021. However, under a pessimistic forecast with the discount rate declining to 2.42% at the end of 2020 and 1.82% by the end of 2021, with annual asset returns of only 2.5%, the funded ratio would decline to 83% by the end of 2020 and 76% by the end of 2021.

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Home > News > Risk > A Likely Electoral ‘Blue Sweep’ Will Steepen Yield Curve, Credit Suisse Says
Risk

A Likely Electoral ‘Blue Sweep’ Will Steepen Yield Curve, Credit Suisse Says

With Democrats ruling the White House and Congress, bigger federal spending should spur yield-raising inflation, report contends.

By Larry Light


Look for a “blue sweep” in the upcoming election, which will steepen the Treasury yield curve, Credit Suisse says.

The odds are growing that Democrat Joe Biden will be the next president and that his party will control both chambers of Congress, wrote Jonathan Cohn, the bank’s New York-based head of rates trading strategy, in a research note.

As a result of increasingly brighter Democratic prospects for November 3, he reasoned, expect an uptick in inflation due to Biden’s ambitious spending plans—which his party’s lawmakers will push through. That’s coupled with the Federal Reserve’s easy money policy and its expressed tolerance for somewhat higher prices.

Stalled Washington stimulus talks and other dire outcomes, like a contested election that drags on, previously made the bank doubtful of any yield curve movement, he indicated. But “the meaningful change to the election calculus overwhelms these considerations and suggests leaning short (and toward steepening) is most prudent,” Cohn wrote.

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Should there be a pickup in inflation, which has been quiescent for years, then the longer end of the yield curve is likely to rise. That would be good news for the banking industry, which makes money off the difference between what it pays for deposits and what it charges borrowers, which is larger. More inflation usually betokens economic expansion.

Indeed, right now the yield curve is steepening, to a degree, perhaps in anticipation of such a development. The year started off the spread between the one-month Treasury bill and the 30-year bond at a mere 0.8 percentage point.

At the beginning of September, the difference had grown to 1.25 points. This is because the long bond, not to mention the benchmark 10-year Treasury note, have increased their yields. By yesterday, the spread had widened to 1.37.

If the polls are right (and they were wrong four years ago, when Hillary Clinton seemed to have the lead), Biden is a clear favorite. A recent CNN survey showed the Democratic presidential nominee ahead nationally by 14 percentage points, and other polls show Biden in the lead in key battleground states that Donald Trump had captured in the 2016 race.

What’s more, according to the betting website PredictIt, Democrats have an 89% chance of keeping the House and a 68% probability of taking over the now-GOP-run Senate. These odds are both record highs. Biden’s odds of prevailing are 69%.

Cohn maintained that “the higher likelihood of a blue sweep scenario seems to be the more dominant narrative,” and thus longer-maturity Treasuries are not the place to be. Rising yields translates to lower bond prices. He advised staying in shorter-term government paper, which likely will keep its tiny yields and suffer no price decreases.

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