July 2023 Pension Finance Update

Pension finances enjoyed another strong month in July, driven by higher stocks and higher interest rates. Both model plans we track (1) gained ground last month: our traditional Plan A gained 3% and is now up almost 10% for the year, while the more conservative Plan B gained 1% during July and is now up more than 2% for the year:


Stocks gained ground again in July, with all major indexes now boasting double-digit increases this year. A diversified stock portfolio gained 4% during July and is up 20% through the first seven months of 2023:

Interest rates inched higher in July while credit spreads tightened. As a result, bonds lost 1% during July. For the year through July, a diversified bond portfolio has earned 2%-3%, with long duration corporate bonds performing best.

Overall, both plans we track gained ground again last month: Plan A gained 2% during July and is now up more than 11% for the year, while Plan B added 1% last month, ending July up 5% for the year.

(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, 2022 and July 31, 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 last month. As a result, pension liabilities were flat again last month and remain up 2%-3% for the year through July.


Pension sponsors have enjoyed a strong run so far this year, with stock markets producing double-digit returns while interest rates have held up above 5%. The graphs below show the movement of assets and liabilities during the first seven months 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 have moved in a narrow range this year, and a flat yield curve is compressing rates for plans of different durations. 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 7/31/2023