Ryan ALM Pension Monitor YTD 2023
Source: Ryan ALM Pension Monitor YTD 2023
(Through June 30, 2023)
Pension plan liabilities need to be measured and monitored regularly. Without knowledge of plan liabilities, the allocation of plan assets cannot be done efficiently or appropriately. The funded ratio/status of pension plans are present value calculations. Each type of plan is governed by accounting rules and actuarial practices, which determine the discount rate used to calculate the present value of liabilities. Single employer corporate plans are under ASC 715 (FASB) discount rates (AA corporate zero-coupon yield curve); multiemployer plans and public plans use the ROA (return on asset assumption) as the liability discount rate. The difference in liability growth between these plans can be quite significant (see 2022’s differential of 31.5%), which will affect funded status and contribution levels.
The table below compares these different liability growth rates (based on a 12-year average duration) versus the asset growth rate based on the P&I asset allocation survey of the top 1,000 plans which is updated annually.
| ASSET ALLOCATION | YTD 2023 Return | Corporate | Public | Union |
|---|---|---|---|---|
|
Domestic Stock International Stock Global Equity Domestic Fixed Income Global Fixed Income Cash Private Equity Real Estate Equity* Other |
16.9% 12.2% 14.3% 2.1% 1.7% 2.3% 5.8% -5.4% 3.6% |
11.1% 6.1% 6.3% 44.4% 0.9% 2.2% 12.4% 5.5% 11.1% |
22.1% 13.4% 4.5% 19.4% 1.6% 1.6% 15.1% 11.6% 10.7% |
18.7% 9.1% 13.6% 28.9% 0.0% 0.7% 10.7% 9.4% 8.9% |
| TOTAL ASSETS Growth Rate | 5.3% | 7.1% | 7.3% | |
| LIABILITIES Growth Rate** | 4.2% | 3.6% | 3.6% | |
| Asset Growth – Liability Growth | 1.1% | 3.5% | 3.7% |
Index Benchmarks: Domestic Stock = S&P 500; Int’l Stock = EAFE, Global Equity = All Country World; Domestic Fixed Income = BB Aggregate; Global Fixed Income = FTSE World Gov’t (unhedged); Cash = Ryan ALM Cash Index; Private Equity =10-year return for the R2500 + 2%; *Real estate Equity =NFI-DP Index (one month lag); Alternative Investments and Other = CPI-U & 3%.
** Liabilities (corporate) = Ryan ALM ASC 715 discount rate and Liabilities (Public, Multiemployer) = 7.25% ROA
The graph below shows the contrasting annual differences of asset versus liability growth for corporate and public plans since 2015. The impact of different accounting rules (FASB vs. GASB) can create confusion, as reflected in the chart below.
Footnote: The measurement of asset growth to liability growth is an annual calculation beginning on December 31, 2015. For periods shorter than 1-year, the observation is a YTD calculation.
With regard to the first half of 2023, Corporate funding underperformed Public funding as declining interest rates YTD had a slightly greater impact on the present value of a plan’s future benefits. In addition, the much higher exposure to US fixed income within corporate pension plans (44.4%) versus both public (19.4%) and multiemployer (28.9%) and the far less exposure to US equities (11.1%) versus publics (24.4%) and multiemployer (21.8%) had a meaningful impact on the average total return for those plan types.