Defined benefit (DB) plans are affected by many forces—including interest rates and market returns. So, we provide this Principal® Pension Risk Management Dashboard to bring together information that can help plan sponsors and their advisors track the financial statistics essential to help manage DB plan risks.
The dashboard contains key interest rate and asset return data to help plan fiduciaries make informed risk management decisions, including liability driven investing and risk transfer through lump sums or annuities.
Note: The data provided here is general and not intended to precisely reflect the information for any particular pension plan.
Data as of March 31, 2024
For where to go from here, talk with your advisor or email us.
Based on three hypothetical plans of varying maturities
Change in rates is calculated for an average plan for period starting as indicated by column header and ending with last month.
This table shows trends of the discount rate over the last 12 months. Discount rates vary with plan duration, with longer duration liabilities generally producing higher discount rates. Note that the line graph above matches the results.
AP indicative rates are based on sample populations:
Actual AP pricing varies. The duration for Retiree, Deferred, and Mature Plan is calculated as the sensitivity of the present value of cash flows for each group to a 1% change in the AP rate. Liability comparison includes latest published mortality improvement assumption from the Society of Actuaries.
This chart provides a current estimate for rates used by insurers in determining annuity purchase premiums. Annuities are generally priced at rates lower than accounting discount rates, so the price of annuities is usually higher than the accounting liability. The ratio of estimated purchase price over the accounting liability is shown on the bottom line. This information can be used to estimate annuity premiums, so you can decide when to purchase annuities to permanently transfer risk.
Balancing the risk and reward characteristics of a pension investment portfolio against the liabilities of a plan is a key element of pension risk management. Understanding the sources of net return and volatility is important for plan sponsors and their advisors when setting their asset allocation strategies.
Three main asset classes are monitored here:
Equities—returns typically not closely tied to movement of a typical pension liability
Core bonds—generally less responsive to interest rate changes than a typical pension liability
Long term bond—generally most closely matches the behavior of a typical pension liability
This chart shows how various asset classes have performed versus liabilities over the past year, providing insight into asset/liability volatility. Notice how the long term bond line tracks the liability, while the equity line demonstrates significant volatility, both positive and negative.
Equity—75% US Equity (S&P500)1 and 25% non US Equity (MSCI-EAFE)2
Core Bond (Bloomberg Aggregate Bond Index)3
Long Term Bond (Bloomberg Long Govt/Credit Index)4
Liability returns (accounting) for an average plan with current duration of approximately 17 years.
Liability returns are calculated based on interest rate changes only; annual accruals, demographic changes and/or other liability gain/losses NOT reflected.
The portfolio returns shown assume monthly rebalancing.
The monthly return data for the three main asset classes (from the graph) are shown over the past twelve months. It shows how various asset classes have performed versus liabilities over the past year, providing insight into asset/liability volatility.
1 Standard & Poor's 500 Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. S&P 500 is a trademark of S&P Global and is used under license. Source: FactSet
2 MSCI - EAFE Index NDTR D is listed for foreign stock funds (EAFE refers to Europe, Australia, and Far East). Widely accepted as a benchmark for international stock performance, the EAFE Index is an aggregate of 21 individual country indexes. Source: FactSet
3 Bloomberg Aggregate Bond Index represents securities that are domestic, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. Source: FactSet
4 Bloomberg Long Gov’t/Credit Index is the long component of the U.S. Gov’t/Credit index which must have a maturity of 10 years or more.
The returns we publish for the equity indexes are total returns, which include reinvestment of dividends.
We rely on various models, internal and external, which were used for their intended purposes. Underlying data, assumptions, methodologies, model inputs and resulting outputs have been reviewed and are reasonable. There are no known weaknesses or material inconsistencies.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements, and when estimating annuity purchase pricing using actuarial-adjusted treasury curves.
Performance of indexes reflects the unmanaged result for the market segment of the selected stocks or bonds represented. There is no assurance an index-based investment option will match the performance of the index tracked. Index performance information reflects no deduction for fees, expenses, or taxes. Indices are unmanaged and individuals cannot invest directly in an index.
Investing involves risk, including possible loss of principal. Equity investment options involve greater risk, including heightened volatility, than fixed–income investment options. Fixed–income investments are subject to interest rate risk; as interest rates rise their value will decline.
Insurance products and plan administrative services provided through Principal Life Insurance Company® Securities offered through Principal Securities, Inc., member SIPC and/or independent broker-dealers. Referenced companies are members of Principal Financial Group®, Des Moines, IA 50392.
This material is approved for public use, but is intended for financial professionals.
Principal®, Principal Financial Group®, and Principal and the logomark design are registered trademarks of Principal Financial Services, Inc., a Principal Financial Group company, in the United States and are trademarks and service marks of Principal Financial Services, Inc., in various countries around the world.
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Securities offered through Principal Securities, Inc., member SIPC
Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group®, Des Moines, IA 50392.