There were major hits to both asset and liability measures, as equity returns were uniformly negative and interest rates dropped significantly. The Towers Watson Pension Index dropped 5.1% to 74.2, essentially giving up all the prior quarter’s gains.
The index tracks the performance of a hypothetical pension plan invested in a 60% equity/40% fixed income portfolio. That portfolio recorded a -1.5% return for January. The index also tracks two alternative investment portfolios with different mixes of equity and fixed income. Monthly returns on the 20% and 60% fixed income portfolios were -2.4% and -0.6%, respectively.
In addition, the index tracks a second version of the 60% fixed income portfolio that incorporates longer duration fixed income investments. That portfolio returned a positive 1.1% for January. It continues to trail the shorter duration portfolios over the prior 12-month period, with the performance shortfall obviously attributable to the increase in long bond yields over this period.
Pension liabilities as defined for U.S. accounting purposes are typically measured based on yields on high quality corporate bonds as of the measurement date. Using its own methodology, which matches those corporate yields to projected cash flows, the index determined the benchmark discount rate for January to be 4.62%, a decrease of 27 basis points for the month.
Similar to bond prices, the index notes that values for pension obligations move in the opposite direction of interest rates. Towers Watson’s liability index, which is based on projected benefit obligations, increased 3.8% for January. This reflects the combined effects of interest accumulation and the decrease in the discount rate.
According to Towers Watson, the index provides an indicator of capital market effects on pension plan financing, with individual plan results varying due to factors such as portfolio composition, investment management strategy, liability characteristics and contribution policy.
More information about the January results of the index can be downloaded here.