Pension Finance Update June 2024

Pension finances ended June on a positive note, capping an excellent six month start to 2024. Both model plans we track[1] enjoyed positive experience again in June, as higher stock markets more than offset the impact of lower interest rates. Plan A improved a fraction of 1% last month, ending June up more than 8% this year, while Plan B also gained a fraction of 1% in June and is now up 2% through the first half 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

Stocks were mixed during June. A diversified stock portfolio gained almost 2% last month and is now up more than 10% for the year through June, with US large cap and tech stocks leading the way:

Treasury rates fell 0.15% during June, while corporate bonds slipped less than 0.1%, increasing credit spreads during the month. As a result, bonds gained 1%-2% during June, ending the month down 1%-4% for the year, with long duration bonds performing worst.

Overall, our traditional 60/40 portfolio gained 1% last month and is now up 5% for the year, while the conservative 20/80 portfolio added less than 1% during June, ending the second quarter even 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 June 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 0.05% in June but remain up close to 0.5% through the first two quarters of 2024. As a result, pension liabilities rose 1% last month but remain down 2%-4% for the year through June, with long duration plans seeing the largest drops.

Summary

Sustained higher interest rates and solid stock market returns have allowed pension sponsors to grind out consistent monthly incremental improvement through the first half of the year. The graphs below show the movement of assets and liabilities during the first six months 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 modestly lower 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 2024, along with estimates for 2025. Pre-relief, both 24-month averages and December ‘spot’ rates, are also included.