Pension Finance Update November 2024

Strong US stock market returns propelled pension finances to a new 2024 high-water mark in November. Both model plans we track[1] gained ground last month: Plan A improved more than 1% last month and is now up 10% this year through November, while Plan B gained a fraction of 1% and is now up 2% through the first eleven 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

US stocks had another strong month during November. A diversified stock portfolio gained more than 4% last month and is now up 20% for the year through November, with US stocks leading the way:

Interest rates fell 0.1% last month. As a result, bonds gained 1%-2% during November, ending the month flat to up 3% for the year, with short duration corporate bonds performing best.

Overall, our traditional 60/40 gained 3% last month and is now up almost 12% for the year, while the conservative 20/80 portfolio gained 2% last month, ending November up almost 5% 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 November 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 fell 0.1% in November. As a result, pension liabilities rose 1%-2% last month and are now up 1% to 3% for the year through November, with long duration plans enjoying the best experience.

Summary

We are closing in on the fifth consecutive year of improved pension finances, far and away the best run pension sponsors have enjoyed this century. Most pension sponsors are seeing improved funded ratios again this year. The graphs below show the movement of assets and liabilities during the first eleven months of 2024:

Looking Ahead

Sustained higher interest rates since late 2022 have substantially diminished the impact of pension funding relief during 2023, 2024, and (it appears) 2025. Underfunded plans are likely to see higher required contributions in the next few years.

Discount rates for corporate financial reporting moved lower last month. We expect most pension sponsors will use effective discount rates in the 4.9%-5.3% range to measure pension liabilities on their balance sheets 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.