Corporate pension funds in the world's largest retirement markets posted stellar gains in 2019 on the back of aggressive monetary policy stimulus, but many ended the year with little to show in terms of improved funding levels.
The U.S. Federal Reserve Board's abrupt shift to monetary easing from tightening as 2019 began ignited stock and bond rallies around the globe. For the year, the S&P 500 surged 31.5%, the MSCI All Country World index climbed 26.6% and the MSCI Emerging Markets index gained 18.4%. A spate of central bank rate cuts pushed bond prices higher as well, with the Bloomberg Barclays U.S. Long Credit Total Return index rising 23.4% and the U.S. Aggregate adding 8.7%.
That tailwind produced a banner year for corporate pension funds in the world's seven largest retirement markets — the U.S., U.K., Japan, Australia, Canada, the Netherlands and Switzerland — with gains ranging from 18.2% in the Netherlands to 6.8% in Japan, according to investment consultants' estimates.
For 2018, which ended with a dramatic global sell-off of stocks in reaction to the Fed's rate hikes, not one of those pension fund markets reported a positive average return.
But last year's recovery proved a double-edged sword for a number of big pension markets, as falling interest rates boosted long-term pension liabilities as well.
For U.S. corporate pension funds, 2019 was a "horse race between asset and liability growth," said Steven J. Foresti, chief investment officer at Santa Monica, Calif.-based investment consultant Wilshire Consulting.
U.S. plans posted average investment returns of 16.8% for the year, as stocks and bonds alike delivered gains of roughly 20%, Mr. Foresti said.
An environment like that — which spawned the strongest annual gain since a 19% surge in 2003 — would normally produce a considerable improvement in funding levels. But instead, Wilshire's tally for the aggregate funding ratio of U.S. corporate pensions only edged up to 88.2% at the close of 2019 from 87.5% the year before, he said.
"Assets were working hard for investors" but a roughly 1 percentage-point fall for the year to 2.4% in the U.S. AA corporate bond yield used to discount long-term pension obligations led to an almost commensurate increase in liabilities, Mr. Foresti said.
On the positive side, funding levels of close to 90% "aren't too shabby," leaving corporate funds in a decent position to continue — along their planned "glidepaths" — taking risk off the table as and when funding levels push higher, he said.
But with little change in funding levels over the past year, current exposure to equities — in the neighborhood of 40% or more — should remain in place, even though Wilshire's outlook for equity returns over the coming 10 years stands now at around 6%, well below historic averages, Mr. Foresti said.