Pension Finance Update June 2023

Higher stock prices translated to another good month for pension finance in June, capping a strong first half of 2023 generally. Both model plans we track(1) gained ground last month: our traditional Plan A gained 3% and is now up more than 7% for the year, while the more conservative Plan B gained 1% during June, ending the first of half 2023 up almost 2%: 

 Assets 

Stocks gained ground across the board during June, with all indexes ending the first half in 2023 with solid gains [led by the monstrous performance of technology stocks (NASDAQ)]. A diversified stock portfolio gained more than 5% during June and more than 15% during the first half of 2023:

Interest rates inched higher in June. As a result, bonds lost a fraction of 1% during June. For the year through June, a diversified bond portfolio has earned 2%-4%, with long duration bonds performing best. 

Overall, both plans we track gained ground last month and during the first half of 2023: Plan A gained 3% during June and is now up 9% for the year, while Plan B added 1% last month and ended the first half of 2023 up 4%. 

(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.    

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, 2022 and June 30, 2023, and it also shows 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 so far this year: 

Corporate bond yields edged higher during June. As a result, pension liabilities were flat last month and remain up 2%-4% for the year through June. 

Summary 

During the first half of 2023, stock markets surged, while interest rates held steady at 5% or higher. As a result, pension sponsors enjoyed gains during the first half of 2023, building on top of largely positive experience during the previous two years. The graphs below show the movement of assets and liabilities during the first half of 2023: 

Looking Ahead 

Pension funding relief was signed into law during March of 2021, and additional relief was provided by November 2021 legislation. The new laws substantially relaxed funding requirements over the next several years, but the increase in rates since 2021 has eroded the impact of relief. 

Discount rates edged higher last month. We expect most pension sponsors will use effective discount rates in the 5.0%-5.2% range to measure pension liabilities right now. 

The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2023, along with estimates for 2024. Pre-relief, both 24-month averages and December ‘spot’ rates, which are still required for some calculations, such as PBGC premiums, are also included. 

* October Three estimate, based on rates available as of 5/30/2023.