U.S. pensions stuck in the red despite stock market boom
10:23 pm
IT companies file lawsuit against USCIS over shorter duration of H1B visasWhile U.S. corporate pensions regained some swagger after Wall Street’s record run this summer, they are still far from their heyday before the 2007-2009 credit crunch when they appeared to be in great shape to meet retirement obligations.
Rockbottom bond yields around the world remain the biggest obstacle for many pensions as they try to backfill a $400 billion funding gap and shore up funds to cover payments to current and future retirees.
This low-rate climate is not expected to change much even as the Federal Reserve prepares to reduce its $4.2 trillion of bond holdings possibly from next month and investors speculate whether the European Central Bank may slow its bond purchases.
"We are still not back to where we were before the financial crisis, despite the great run in equities and fixed income markets over the last eight to nine years," said Mike Moran, chief pensions strategist at Goldman Sachs Asset Management.
Pensions` stock holdings have appreciated considerably this year, but their value has not caught up with their liabilities, or what they owe their retired workers.
The current value on pension liabilities is based on or "discounted" by bond yields, particularly those on corporate bonds. Liability value climbs with low yields because future bond income to meet payouts is low.
"Pension fund status hasn`t improved as much as you might think because the discount rate has stayed persistently low and has even fallen in some cases," said Matt McDaniel, U.S. head of defined benefits at Mercer Consulting.PRESSURE ON YIELDS
For instance, yields on U.S. investment-grade corporate bonds are about half what they were before the financial crisis and, at around 3.13 percent, they remain 2 percentage points below their long-term average of about 5.13 percent, according to an index compiled by Bank of America Merrill Lynch . Those yields have declined about a quarter percentage point this year.
Heavy investor demand and muted inflation have pressured domestic bond yields lower.
On the other hand, investors have snapped up stocks as an improving global economy and strong corporate earnings have offset less easy money from the Federal Reserve and delays in Washington on promised tax reform and other fiscal stimulus.
The benchmark S&P 500 equity index is at all-time highs, producing a year-to-date total return, including reinvested dividends, of 13.2 percent. The Nasdaq, also at a record, has delivered a year-to-date total return of 20.9 percent.
All in all, the aggregate funding level of S&P 1,500 companies fell 1 percentage point in August to 82 percent. This was unchanged from the end of 2016 but some 15 points higher than the low seen in 2011, data from Mercer released last week showed.
The aggregate funding status before the financial crisis was at 100 percent.
This meant these retirement programs still needed $404 billion to fill their funding deficit, $12 billion less than in June but down only $4 billion from the end of 2016, Mercer data showed.HIGHER PENSION INSURANCE
The viability of defined benefit pensions, which promise fixed monthly payments, is critical to people who already rely on them or will depend on them in retirement.
By 2030, more than 20 percent of U.S. residents will be age 65 and over, against 13 percent in 2010, government data showed.
Pensions need to ensure their solvency as funding pressure persists in the current low interest rate climate.
Some companies have transferred their pension plans to be managed by insurers, while others have sold bonds to raise cash to fund their pensions.
The Pension Benefit Guarantee Corp., which insures defined benefit plans from insolvency, has been ratcheting up their guarantee fees.
"Effectively, U.S. plans were for the first time penalized for sitting on their hands and waiting for a better day through higher variable rate premiums," Bank of America Merrill Lynch rates strategist Shyam Rajan wrote in a research note.
By 2019, the fixed-rate part of the guarantee fee will go up to 8 percent of underfunded assets from just under 7 percent currently, while the variable-rate portion will climb to 4.2 percent from the current 3.4 percent.STOCK CORRECTION
Pensions are on a healthier standing following Wall Street`s bull run, but analysts worry a pullback may be in the offing, which would deal a blow for retirement plans.
Many of them have adopted a strategy, known as "derisking," where they raise their holdings of bonds and decrease their ownership of stocks once they achieve their desired funding level or bond yields rise to a certain level.
"If the market cooperates, more pension plans will immunize their liabilities," Jesse Fogarty, senior portfolio manager at Insight Investment.
While a booming stock market is an encouraging development, higher bond yields would spell a long-term relief for pension funds.
"Pension funds are well enough funded to meet their obligations in the short term, but they are still struggling to be well funded on a long term basis largely due to interest rates remaining at very low levels by historical comparison," Mercer`s McDaniel said.
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)
