Pension Finance Update February 2025

In February, pension finances suffered their worst monthly loss since 2022, due to the usual culprits, lower stocks plus lower interest rates. Both model plans we track[1] lost ground last month: traditional Plan A lost 3%, ending the month down more than 1% for the year, while the more conservative Plan B lost 1% and is down a fraction of 1% through the first two months of 2025:

[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

US stocks fell last month, producing a 1% loss in our diversified portfolio, which remains up more than 1% for the year on the strength of overseas markets.

Interest rates fell more than 0.25% last month after a flat January. As a result, bonds ended February up 2%-4% so far this year, with long duration Treasuries performing best.

Overall, our traditional 60/40 portfolio ended the month up 2% so far this year, while the conservative 20/80 portfolio is now up almost 3% through the first two months of 2025.

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, 2024 and February 28, 2025 (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 2025:

Corporate bond yields declined 0.25% in February after a flat January. As a result, pension liabilities have grown 3%-4% through the first two months of 2025, with long duration plans seeing the largest increases.

Summary

Lower interest rates put a modest dent in pension finances last month, pushing plans underwater through February. The graphs below show the movement of assets and liabilities during the first two months of 2025:

Looking Ahead

Sustained higher interest rates since late 2022 have substantially diminished the impact of pension funding relief during 2023, 2024, and 2025. Underfunded plans are likely seeing higher required contributions for the next few years.

Discount rates moved 0.2% lower last month. We expect most pension sponsors will use effective discount rates in the 5.1%-5.4% 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 2025, along with estimates for 2026, including the rate “floor” that applies to the 24-month average rates under funding relief for each segment.