Stock markets tumbled in April, but sharply higher interest rates offset most or all of the impact for pension sponsors. Our two model plans1 saw mixed experience on the month, with Plan A treading water, remaining up almost 5% for the year, while the more conservative Plan B lost 1% last month and is now even through the first four months of 2022:
Stocks moved sharply lower in April. A diversified stock portfolio lost 8%-9% in April and is now down 14% year-to-date:
Interest rates continued to move higher in April, up more than 0.5% during the month. Treasury rates have increased more than 1.1% this year, while corporate bond yields have risen 1.4%, indicating an increase in credit spreads this year. As a result, bonds lost another 3%-6% last month, and are now down 9%-16% for the year, with long duration and corporate bonds performing worst.
Overall, our traditional 60/40 portfolio lost 7% last month and is now down 13% for the year, while the conservative 20/80 portfolio lost 6% in April and is now also down 13% through the first four months of 2022.
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.
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, 2021 and April 30, 2022, and it also shows the movement in the curve last month. The second graph below shows the dramatic increase in effective GAAP discount rates for pension obligations of various duration so far during 2022:
Corporate bond yields moved up another 0.6% last month and are now up 1.4% for the year. As a result, pension liabilities fell another 5%-9% during April are now down 13%-19% for the year, with long duration plans seeing the largest declines.
Despite a double-digit drop in stocks so far this year, pension sponsors have managed to tread water or better due to sharply higher interest rates. The graphs below show the movement of assets and liabilities during the first four months of 2022:
Pension funding relief was signed into law last March, and additional relief was provided by November legislation. The new laws substantially relax funding requirements over the next several years, providing welcome breathing room for beleaguered pension sponsors.
Discount rates moved 0.6% higher last month. We expect most pension sponsors will use effective discount rates in the 4.0%-4.4% range to measure pension liabilities right now.
The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2022, along with estimates for 2023. 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 4/30/2022.