Archived Insight | January 28, 2021
During the fourth quarter of 2020 (Q4), the funded status of the model private sector single-employer pension plan examined in each issue of Prism improved by 6 percentage points, to 88 percent.
This increase in funded status is primarily attributable to a 10 percent asset gain offset by a 2 percent increase in liabilities, related to a decrease in corporate bond yields.
High-quality corporate yields fell during Q4, decreasing by 5 basis points — the net result of a 20 basis-point increase in U.S. nominal Treasury yields and a 25 basis-point decrease in credit spreads.
Any change in the shape of the yield curve could have a dissimilar impact on liabilities for plans with different maturities. For background on yield curves read our primer.
During Q4, financial markets continued to rebound, providing positive returns for a third straight quarter. Even as COVID-19 cases climbed globally and some leaders reinstituted lockdowns, there was some positive news; two separate COVID-19 vaccines were approved for use by U.S. regulators in December. Congress also passed a long-awaited second COVID-19 relief package just before the end of the year.
Stock market performance was very strong both domestically and internationally. U.S. equities, developed international equities and emerging market equities all posted double-digit positive returns. International stocks outperformed U.S. stocks thanks, in part, to a depreciating dollar.
Domestically, small caps beat large caps (with small cap stocks posting their best quarterly return in more than three decades), and value stocks beat growth stocks — as positive vaccine news resulted in investor optimism over stocks that were most adversely affected by the pandemic.
Fixed income returns were slightly positive domestically. Again, aided by a depreciating U.S. dollar, international bonds outperformed U.S. bonds.
U.S. Treasury yields ended the quarter a bit higher than where they began, while investment-grade credit spreads tightened a bit. As a result, U.S. government bond returns were slightly negative for the quarter, and U.S. investment-grade credit provided slightly positive returns.
In December 2020, the Federal Open Market Committee (FOMC) decided to maintain the target range for the federal funds rate at 0 to 0.25 percent. FOMC further signaled that the target range could remain near zero for an extended period.
The yield on the 10-year Treasury note ended the quarter at 0.93 percent.
Plan sponsors should examine changes in their own DB plans’ assets, liabilities and funded ratios from the vantage point of both accounting and funding metrics.
We can help employers project their DB plans’ funded ratios with a complete view of the range of a plan’s possible future statuses, presenting early warning signs of potential challenges.
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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.
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