Article July 7, 2021

US pension briefing – June 2021

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Key takeaways

  • Pension discount rates declined 0.20% – 0.25% in June which will translate to pension liability increases of 2-3% for a typical pension plan.
  • Asset performance was also generally positive for June, with both US fixed income and equities up slightly for the month.
  • Most pension plans will have seen little change in their funded status during the month of June as liability increases from declining discount rates were generally matched by positive asset returns.

 

June 2021 summary

Pension discount rates slid further in the month of June, consistent with the fall in long-term US treasury yields.  Although this will mean higher liabilities compared to last month for a typical pension plan, discount rates are still up around 0.30% year-to-date.  Still, June represented the biggest monthly swing in discount rates since January and the continuation of a downward trend in rates over the second quarter.

Balancing out the less-than-good news on the discount rate front were positive asset returns across most primary asset classes. Equity markets in the US performed better than international indices, a reversal from May.  Long bonds and US equities posted gains generally in the 2-3% range, while international developed equities were down about 1%.

A typical pension plan may see little change in funded status for the month of June, given positive asset returns will largely be offset by declining discount rates.  However, pension funded status performance for June will vary depending on the type of equity and fixed income holdings. Plans with equity holdings that outperformed the liability growth over the month will have fared better.  Plans that are underfunded or have few liability-matching bonds will have fared worse.

 

Discount rates & asset returns

FTSE Pension Discount Rate Index - June 2021

Discount rates decreased sharply in June, dropping by 0.24%. However, current discount rates are still up 0.32% since the end of 2020 and are up 0.13% from this time last year. The FTSE pension discount index finished June at 2.84%.

 

June returns (%)

US equities saw gains in June with strong economic data benefitting from the vaccine rollout and loosening restrictions, while other developed and emerging countries continued to lag. Despite higher inflation and upward pressure on rates, longer-term treasury yields fell while shorter- and mid-term rates ticked up. Credit spreads were mixed, where high yield spreads tightened slightly and emerging market debt spreads widened. The US Dollar appreciated against major currencies and further reduced gold’s appeal.

 

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SECURITY INDICES: This presentation includes data related to the performance of various securities indices.  The performance of securities indices is not subject to fees and expenses associated.  Investments cannot be made directly in the indices.   The information provided herein has been obtained from sources which River and Mercantile LLC believes to be reasonably reliable but cannot guarantee its accuracy or completeness.
CONFIDENTIAL:  For addressee use only, not to be disclosed to any other person without express consent from River and Mercantile LLC.  Past performance cannot be relied upon to predict future results.  River and Mercantile LLC is an investment advisor registered with the US Securities and Exchange Commission.

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