Pension Finance Update April 2024

Pension finances were mixed during April, as higher interest rates largely offset the impact of lower stock markets for both model plans we track [1]. Plan A improved less than 1% last month, ending April up more than 6% this year, while Plan B slipped a fraction of 1% in April but remains up more than 1% through the first four months of 2024:

[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.

Assets

Stocks were broadly down in April. A diversified stock portfolio lost 4% last month but remains up more than 3% for the year through April:

Interest rates jumped during April, with Treasuries rising 0.5% while corporate bonds rose 0.4%, producing the lowest credit spreads in decades. As a result, bonds lost 3%-5% during April, ending the month down 4%-8% for the year, with long duration Treasuries performing worst.

Overall, our traditional 60/40 portfolio lost more than 3% last month and is now up less than 1% for the year, while the conservative 20/80 portfolio lost 3% during April, ending the month down almost 3% for the year.

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, 2023 and April 30, 2024 (along with 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 2024:

Corporate bond yields rose 0.4% in April and are now up 0.65% through the first four months of 2024. As a result, pension liabilities fell 3%-5% last month and are now down 5%-8% for the year through April, with long duration plans seeing the largest drops.

Summary

Sustained higher interest rates continue to provide a lift to pension finances this year. The graphs below show the movement of assets and liabilities during the four months of 2024:

Looking Ahead

Higher interest rates since late 2022 have (for now) effectively ended pension funding relief that has been in place since 2012. Underfunded plans are likely to see sharp increases in required contributions in the next year or two.

Discount rates moved 0.4% higher last month. We expect most pension sponsors will use effective discount rates in the 5.4%-5.7% range to measure pension liabilities right now.

The table below summarizes rates that calendar-year plan sponsors are required to use for IRS funding purposes for 2024, along with estimates for 2025. Pre-relief, both 24-month averages and December ‘spot’ rates, are also included.