(February 11, 2014) — January was a testing month for pension plans as funded status declined in correlation with drops in equity markets and interest rates, according to Russell Investments.
Corporate pension plans enjoyed the upswing of US equities in 2013, ending the year in a “much healthier position” than where it started—the funded status of Russell’s open representative plan was 88% in December, a 14.6 percentage point increase from 2012.
In 2014, the open plan fell back to 84.2% and the representative frozen plan fell from 81.6% to 79.5% funded.
“While the speed of the reversal has been unexpected, it’s events like this that remind us why planning is essential,” said Marty Jaugietis, managing director of Russell’s liability-driven investing (LDI) solutions, and Calvin Gong, the firm’s LDI portfolio manager.
According to the report, pension plans should have made plans to de-risk when funding was high: “A significantly improved funded status and favorable markets is precisely the time when one should consider de-risking to preserve those gains.” Russell recommended implementations of liability-responsive asset allocation schedules.
Advanced planning against such reversal of a bull equity market would require a robust policy-making and implementation process within the fund, Russell found.
“This is a roller-coaster ride that pension plans are increasingly trying to avoid; the effectiveness of the policies in place to do so will have been tested by the events of the past month,” the report said.
Internal resources such as a strong governance structure would also help funds make swift changes in their LDI strategies, particularly in their exposures and allocations to guard against acute changes as those felt in January.
The report also found an increase in liability values at all durations—most severely in longer duration liabilities—due to a decline in interest rates so far in 2014. The Barclays-Russell LDI Index reflected this observation, with 6-year index returns at 1.6% year-to-date. 2012 returns were at 7.32%.
Related content: Global Pension Fund Assets Hit $32 Trillion in 2013