Article June 4, 2021

US pension briefing – May 2021

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Key takeaways

  • Pension discount rates declined very slightly in May, meaning most pension liabilities likely saw small increases
  • Asset performance was also positive in May; returns across various asset classes fell in the 0.25%-1.00% range, with international equities being the main outlier at returns north of 2%
  • Most pension plans will have seen very little change in their funded status during the month of May; both assets and liabilities will have grown modestly, and the net effect will be very small, whether positive or negative

 

May 2021 summary

After four months of significant activity, pension plans took a breather in May of 2021, with only small changes in both liabilities and asset values.

Discount rates inched down slightly during the month, ending 0.02%-0.05% lower than their April 30 levels. The practical impact of this small change is that liability growth in May will have been slight for most plans; while sponsors would probably prefer higher yields rather than lower, there are some who will welcome the stability of such a small change after the swings in discount rates we’ve seen over the preceding 16 months.

On the asset side of the ledger, most asset classes also experienced modest appreciation during the month of May. US fixed income saw small gains; prices for long-dated credit increased more than government bonds or those on the shorter end of the spectrum, but the changes were positive across all categories. US equities also saw small gains in May, averaging about half a percent of return for the month. International equities had a stronger month, with emerging markets posting returns north of 2% and developed international equity markets performing even better. This will help close the gap in year-to-date returns we’ve seen develop, as until now US equities have been the stronger performer compared with international markets.

Putting it all together, it’s likely that pension plans with various liability profiles and investment strategies all had a quiet month when it comes to funded status. Most plans will have seen only modest excess liability growth, which will have been largely offset by asset performance. Whether the net impact is positive or negative will depend on the plan, but in most cases, the changes will be small.

 

Discount rates & asset returns

FTSE Pension Discount Rate Index - May 2021

Discount rates remained relatively flat in May, only decreasing by 0.01%. Current discount rates are still up over 0.50% since the end of 2020 and are up around 0.30% from this time last year. The FTSE pension discount index finished May at 3.08%.

 

May returns (%)

Inflation fears dominated the month, sending gold prices soaring. Emerging market and international equities outperformed the US, but all equities rose for the month as re-openings continued to signal increased economic activity. In bond markets, yields on longer term treasuries retreated slightly, but the yield curve remains significantly steeper than at the beginning of 2021. Fixed income generally increased in value over the month.

 

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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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