Pension Finance Update March 2025

Pensions suffered from declining stock markets in March. Both model plans we track[1] lost ground last month: traditional Plan A lost 2%, ending the month down 3% for the year, while the more conservative Plan B lost 1% and is down more than 1% through the first quarter of 2025:

Assets

US stocks fell again last month, producing a 4% loss in our diversified portfolio. Through the first quarter of 2025, a diversified stock portfolio is down almost 3%, with overseas markets significantly outperforming.

Interest rates rose by close to 0.1% last month, ending the quarter about 0.1% lower for the year. As a result, bonds lost 1% in March but remain up 2%-3% through the first quarter of 2025, with long duration Treasuries performing best.

Overall, our traditional 60/40 portfolio lost 3% last month and is now down 1% so far this year, while the conservative 20/80 portfolio lost 1% last month but remains up 1% through the first quarter 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 March 31, 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 rose 0.1% in March. As a result, pension liabilities declined 1% last month but remain up 2%-3% through the first quarter of 2025.

Summary

Pension sponsors suffered from lower US stock markets in the first quarter of the year. The graphs below show the movement of assets and liabilities during the first three 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 0.1% higher last month. We expect most pension sponsors will use effective discount rates in the 5.2%-5.5% 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.

[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.