February 2020 Pension Finance Update

Pension pain intensified in February, as stock markets and interest rates tumbled last month. Both model plans we track[1] lost ground: Plan A lost more than 5%, ending the month almost 10% lower than at the end of 2019, while Plan B slipped 2% and is now down 3% for the year:


Stock markets moved sharply lower last month. Through February, stocks have lost more than 8% so far this year:

Treasury rates plunged another 0.3% in February and are now more than 0.7% lower than at the end of 2019. Corporate yields fell 0.2% and are now almost 0.5% lower this year. In both cases, these are far and away the lowest rates ever seen for US dollars.

As a result, bonds gained more than 2% again last month and are now up 6%-8% so far in 2020, with long duration and Treasury bonds performing best.

Overall, our traditional 60/40 portfolio lost 3% in February and is now down 3% for the year, while the conservative 20/80 gained a fraction of 1% last month and is now up almost 3% through the first two months of 2020.


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, 2019 and February 29, 2020 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 during January:

Corporate bond yields moved down 0.2% in January. As a result, pension liabilities jumped 2%-4% during the month. Liabilities are now 6%-8% higher than at the end of 2019, with long duration plans seeing the biggest increases.


Falling stock markets grab the headlines, but unprecedented low interest rates are at least as significant a story. For pension sponsors, the combination is a real gut check. The graphs below show the movement of assets and liabilities during the first two months of 2020: 

Looking Ahead

Pension funding relief has reduced required plan funding since 2012, but under current law, this relief will gradually sunset. Given the current level of market interest rates, it is possible that relief reduces the funding burden through 2028, but the rates used to measure liabilities will move significantly lower over the next few years, increasing funding requirements for pension sponsors that have only made required contributions. 

Discount rates moved lower again last month. We expect most pension sponsors will use effective discount rates in the 2.5%-2.9% range to measure pension liabilities right now, the lowest rates on record.

The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2020, along with estimates for 2021. Pre-relief, both 24-month averages and December ‘spot’ rates, which are still required for some calculations, such as PBGC premiums, are also included.

[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.