Archived Insight | October 28, 2020
During the third quarter of 2020, the funded status of the model pension plan examined in each issue of our Prism publication improved by 3 percentage points, to 82 percent.
This increase in funded status is primarily attributable to a 6 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 Q3, decreasing by 10 basis points (10 basis points (bps) equaling 0.1 percent), the net result of a 5 basis-point increase in U.S. nominal Treasury yields and a 15 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. Read our primer on the yield curve.
During Q3, financial markets generally provided positive returns as business reopenings continued during July and August. Equity markets met some resistance in September as new COVID-19 cases surged in some parts of the country and Congress failed to agree on a new relief package.
Stock market performance was strong both domestically and internationally. U.S. equities had their best August in three decades before retreating somewhat in September. It finished the quarter up almost 10 percent, outpacing both developed international and emerging market equities. Internationally, emerging markets outperformed developed markets although both performed well. Domestically, large caps beat small caps, and growth stocks beat value stocks.
Fixed income returns were slightly positive domestically. Aided by a depreciating U.S. dollar, international bonds outperformed U.S. bonds. U.S. Treasury yields were again remarkably stable over the course of the quarter, with yields ending the quarter slightly higher than where they began at most maturities.
As a result, U.S. government bond returns were nearly flat for the quarter. U.S. investment-grade credit provided positive returns as credit spreads rallied during the quarter.
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 0.69 percent.
Learn about how investment performance and corporate bond yields over the third quarter of 2020 may have affected your pension plan's experience.
Segal can help employers project their DB plans’ funded ratios through both deterministic modeling and stochastic asset-liability modeling (ALM).
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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