“It was amazing that the equity markets have declined year after year,” Ukonga said in an interview with Wealth Professional. “Hence the pension plan assets are less as compared to the beginning of the year.”
In the universe of pension plans monitored by Mercer, the majority saw negative investment returns in the first quarter. But during that period, bond yields also went through a generally anticipated increase as interest rates increased. Since pension plan obligations are inversely related to interest rates, their liabilities are reduced as a result.
“For the last 20 years until last year, interest rates were mostly declining, and DB plan liabilities increased as a result. Now we are seeing the opposite,” Ukonga says. “I wouldn’t necessarily call it a stroke of luck. This is just a natural consequence of how DB plan obligations are measured.”
While the balance sheets of pension plans have improved, it does not mean that they are in a strong position to face the near-term challenges and uncertainties in the markets. The biggest X-factor for Ukonga is the crisis in Ukraine, as there are many unanswered questions about how long it will last, whether other parties will be involved, and other risks. Due to these uncertain times, he says it is absolutely essential for pension plans to have proper governance and risk management structures.
“For a well-funded, matured and closed pension plan, there is little upside reward for taking the risk,” he says. “So a plan that is well funded, matured and closed should probably reduce its equity market exposure, and better match its fixed income investments on the asset side with its plan obligations. Strategies such as annuity purchases should Adoption also makes sense.”