Retirement update – November 2020
- Global stock markets started the month strong but took a turn for the worse in the last week of the month and ended down 2% – 3%
- Pension discount rates were up about 0.10%-0.15% from the previous month, but are still down noticeably for the year
- For most pension plans, the equity losses for the month will have outweighed the liability gains due to the increase in the discount rate, leading to an overall decline in funded status
October 2020 summary
Recent themes in pension economics continued to play out in October. Equity markets have remained quite volatile, with the VIX (the so-called “fear index”) reaching levels not seen prior to 2020 since the 2011 sovereign debt crisis. The US election and the worsening of the pandemic in Europe and North America were drivers of this volatility and the end-of-month sell-off. Price decreases also impacted long-duration bonds, with yields on 10- and 30-year Treasury bonds increasing approximately 0.20%. Credit spreads tightened during the month, so pension discount rates did not rise as much, but sponsors will likely see October 31 discount rates that are 0.10%-0.15% higher than at the beginning of the month.
The equity market sell off will mean a continued decline in funding levels compared to the start of the year for plans with material equity exposure, likely only partially offset by liability improvement from the increase in discount rates. As of this writing, markets have reacted positively to the end of the US election, even as the results continue to be contested, but we don’t see ourselves being out of the volatility woods just yet.
Discount rates & asset returns
FTSE Pension Discount Rate Index - October 2020
Discount rates increased by 0.13% in October and are back to the level they were at in May. However, current rates are still down 0.44% since year end 2019 and are 1.7% lower than where they were at 2 years ago. The FTSE pension discount index finished October at 2.78%.
October returns (%)
US and foreign developed equities slipped as concerns rose over the second wave of Coronavirus cases and hope for more fiscal stimulus in the US faded. Emerging markets remained resilient benefitting from improving economic data and stricter handling of the virus, especially in Asian countries. Bonds declined with yields rising slightly and credit spreads somewhat narrowing. The Dollar held steady vs. global currencies and Gold depreciated slightly.
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