What Happened in Q3 2020
Equities across all markets fell significantly during the first quarter before recovering in the second and third quarters as a result of central bank stimulus and accommodative monetary and fiscal policies.
In the bond market, government bonds yields fell (government bonds rallied) over the first half of the year as investors fled to safe-haven assets. Thanks to supportive monetary and fiscal policy, equity valuations have recovered. High equity valuations and loose monetary policy have reduced PBI’s long term expected returns. The “traditional” and “liability aware” indices recovered slightly during the second and third quarters thanks to the broad market recovery, while the “liability-driven” index experienced the least volatility and ended the third quarter with a higher funded ratio than December 2019.
Table 1 outlines the movements in the PBI Pension Funding Indices based on four asset strategies that vary in the amount of Liability Aware and return-seeking assets embedded in the fund’s asset mix.
Table 1: PBI Pension Funding Indices
PBI Pension Funding Indices
A funded ratio shows how a plan’s assets compare to the actuarial assessment of the value of the liabilities. In short, it is the “value of assets” to the “actuarial value of liabilities”. Actuaries generally measure the liabilities in two ways, “going concern” and “solvency”. We have focused on going concern as it is the measure most applicable to our plans. The PBI Pension Funding Indices (Table 1) show the approximate impact of market changes on ‘typical’ plans. The Indices show how various asset mix strategies could have performed.
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