Pension Finance Update March 2024

Pension finances enjoyed incremental improvement in March, rounding out another solid quarter. Higher stock markets outpaced higher liabilities, producing improvement in funded status of less than 1% for both model plans we track[1]. During the first quarter, Plan A improved 6% while the more conservative Plan B was up close to 2%:

[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 up across the board again in March. A diversified stock portfolio added 3% last month, ending the first quarter up almost 8%:

Interest rates edged lower last month but are still up 0.25% for the quarter. As a result, bonds increased 1% during March, ending the quarter down 1%-3%, with long duration bonds performing worst.

Overall, our traditional 60/40 portfolio added 2% last month and is now up 4% for the year, while the conservative 20/80 portfolio increased 1% during March, ending the quarter up less than 1%.

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 March 31, 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 fell 0.1% in March but remain up 0.25% through the first quarter of 2024. As a result, pension liabilities added 1% last month but are down 1%-3% for the year through March, with long duration plans seeing the largest drops.

Summary

Interest rates hit 5% in the fall of 2022 and have remained near or above that level since. Meanwhile, stock markets have produced strong returns, translating to good news for pension sponsors. The graphs below show the movement of assets and liabilities during the first quarter of 2024:

Looking Ahead

Sustained 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 0.1% lower last month. We expect most pension sponsors will use effective discount rates in the 5.0%-5.3% 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, which are still required for some calculations, are also included.