The NISA Pension Surplus Risk index fell in July by 0.6 percentage points to 6.9%. The average plan funded status also went down from 84.4% in June to 84% in July.
July’s drop in average funded status followed two consecutive months of improvement. But this was due to discount rate declines that outpaced equity returns.
A closer look at how July compared to June
Despite the fact that the volatility of the asset component fell 0.9 percentage points to 10.9%, it remains at its highest level since the ‘taper tantrum’ in 2013 – the panic that caused a spike in US Treasury yields.
There was also a fall on the other side of the equation, with the liability component of the index moving from 8.9% to 8% as a result of tightening yield spreads.
An area that witnessed gains was domestic equities, which were higher in July as the S&P 500 index rose 5.5%. Even so, the MSCI ACWI stayed flat for the month.
Equities were similarly higher in June as the S&P 500 index rose 1.8%. The MSCI ACWI index also added about 3%.
However, one reason for weakness in July was due to a spike in cases of COVID-19. The summer weather continues to bring people out of quarantine and into large gatherings, causing significant concern that the economic slowdown will continue.
What is the Pension Surplus Risk Index?
The Pension Surplus Risk Index (PSRX) Guide provides pension funds with a forward looking estimate of the average funded status volatility for large defined benefit pension plans.
It incorporates information from the equity, fixed income, derivative and alternatives markets, as well as funded status itself, to gauge general funded status volatility.
Measures of asset class volatility are derived from:
- Rates and yield curve exposure
- Spread exposure
- Equity market risk
PSRX sub-indices also allow pension funds to more accurately identify and monitor their individual funded status volatility by referencing their current funded status, liability duration, and risk asset allocation to published sub-indices.
Pension funds can then approximate the level of surplus risk in their plans relative to the overall defined benefit pension community.
How is the PSRX different to other pension-related indexes?
According to NISA:
“From a risk management perspective, the primary shortcoming of many existing pension indices is that they are backward-looking in nature. The PSRX, based on current implied volatility data from option markets, is a forward-looking estimate of funded status volatility.
“We believe the PSRX and its accompanying sector indices will provide a useful risk measure for CFOs, Treasurers and plan fiduciaries to gauge their pension risk’s influence on enterprise risk, implications for capital structure, and level of beneficiary security, respectively.”
Who is NISA?
NISA Investment Advisors, LLC, is an employee-owned independent investment manager focused on risk-controlled asset management. It manages assets for large institutional investors. Client portfolios include investment-grade fixed income, derivative overlays and indexed equity.