March 2021 Pension Finance Update

Pension finances enjoyed another good month in March, capping the best quarter in memory, led by higher interest rates with stock markets playing a supporting role. Both model plans we track[1] gained ground last month: Plan A gained 4% and is now up more than 11% for the year, while the more conservative Plan B added 1% and is now up more than 2% through the first quarter of 2021: 

Assets

Stocks were mostly higher again in March and all major indexes are ahead at least 3% this year. A diversified stock portfolio gained more than 2% in March and is now up 6% for the year: 

Interest rates rose another 0.2% in March. As a result, bonds lost 2% last month and are now down 5%- 9% for the year, with long duration bonds performing worst. 

Overall, our traditional 60/40 portfolio gained 1% during March and is now up 1% for the year, while the conservative 20/80 portfolio lost 1% in March and is now down more than 4% 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, 2020 and March 31, 2021, 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 2021 so far: 

Corporate bond yields moved up 0.2% in March and are now up 0.75% since the end of 2020. As a result, pension liabilities fell 2%-3% during the month and are now down 7%-12% for the year, with long duration plans seeing the largest declines. 

Summary

What a difference a year makes! A year ago, pension sponsors were looking at a 10% or greater hole in pension finances. The hole reversed by the end of 2020, and this year, funded status has jumped markedly in the first quarter, driven by higher interest rates and steady stock markets. The graphs below show the movement of assets and liabilities for our model plans during the first quarter of 2021: 

Pension funding relief was signed into law during March. The new law substantially relaxes funding requirements over the next several years, providing welcome breathing room for beleaguered pension sponsors. 

Discount rates moved higher again last month. We expect most pension sponsors will use effective discount rates in the 2.9%-3.4% range to measure pension liabilities right now. 

The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2021, along with estimates for 2022, reflecting the new law (ARPA). 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.