June 2021 Pension Finance Update

Pension finances were steady to down 1% in June due to falling interest rates, but both model plans we track[1] remain comfortably in the black for the year: Plan A dropped 1% last month but remains up more than 10% during 2021, while the more conservative Plan B was flat last month and remains up almost 3% through the first half of the year:

Assets

Stocks were mixed but mostly positive last month. A diversified stock portfolio gained almost 2% in June and is now up more than 13% for the year:

Interest rates fell almost 0.2% in June. As a result, bonds gained 1%-2% last month but remain down 2%-4% for the year, with long duration bonds performing worst.

Overall, our traditional 60/40 portfolio gained more than 1% during June and is now up 6% for the year, while the conservative 20/80 portfolio also gained more than 1% last month and is back to even through the first half of 2021.

Liabilities

Pension liabilities (for funding, accounting, and de-risking purposes) are driven by market interest rates. The first graph below compares our Aa GAAP spot yield curve at December 31, 2020 and June 30, 2021, and it also shows the movement in the curve last month. The second graph below shows our estimate of movements in effective GAAP discount rates for pension obligations of various duration during 2021 so far:

Corporate bond yields fell almost 0.20% in June, but they remain up almost 0.40% since the end of 2020. As a result, pension liabilities rose 2%-3% during the month but remain down 3%-5% for the year, with long duration plans seeing the largest declines.

Summary

Pension sponsors benefited from rising interest rates and strong stock markets during the first quarter of the year, and despite rates falling in the second quarter, continued strong stock markets have allowed sponsors to hang on to most of those gains through June. The graphs below show the movement of assets and liabilities for our model plans during the first five months of 2021: 

Looking Ahead

Pension funding relief was signed into law during March. The new law substantially relaxes funding requirements over the next several years, providing welcome breathing room for beleaguered pension sponsors.

Discount rates moved lower last month. We expect most pension sponsors will use effective discount rates in the 2.6%-3.0% range to measure pension liabilities right now.

The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2021, along with estimates for 2022, reflecting the new law (ARPA). Pre-relief, both 24-month averages and December ‘spot’ rates, which are still required for some calculations, such as PBGC premiums, are also included.

[1] Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds. We assume overhead expenses of 1% of plan assets per year, and we assume the plans are 100% funded at the beginning of the year and ignore benefit accruals, contributions, and benefit payments in order to isolate the financial performance of plan assets versus liabilities.