Interest Rates Improved Q2 Funding Ratios

Movement in the effective interest rate decreased pension plan liabilities sharply during the second quarter of 2015.

Due to an increase in the effective interest rate that decreased pension plan liabilities by 10%, the funded status of pension plans rose eight percentage points in the second quarter, from 79% to 87%, according to Sibson Consulting and Segal Rogerscasey.

However, investment performance was weak in the second quarter, with domestic equities returning 0%, international equities rising 1% and global bonds declining by 2%. “A potential default in Greece along with China’s monetary stimulus in response to the Shanghai exchange sell-off heightened uncertainty,” the firms note. (See “Assessing Equities After a Whirlwind Decade.”)

In the U.S., small-cap stocks beat their large-cap counterparts, and growth stocks and value stocks posted similar returns. Developed and emerging market equities outperformed U.S. equities.

Treasury rates rose on strong U.S. economic data for employment and consumer spending. “The Federal Reserve also signaled that, despite the positive economic news, it would take a balanced approach to removing policy accommodation that has kept the benchmark federal funds rate near zero since 2008,”  Sibson and Segal Rogerscasey said.

Stewart Lawrence, senior vice president and head of the Retirement Practice at Segal Rogerscasey, commented on pension plans’ significant exposure to interest rates: “The significant increase in funded status caused by rising interest rates demonstrates the typical plan’s exposure to the uncompensated risk of interest rate movements. As plan sponsors look toward 2016, this might be an appropriate time to raise the issue of considering changes in the plan’s risk-mitigation strategy.”

Sibson Consulting and Segal Rogerscasey’s full report on pension plans’ funded status in the second quarter can be viewed here.