November 2019 Pension Finance Update

Pension finances enjoyed their third consecutive month of improvement in November, mostly due to rising stock markets. Both model plans we track[1] gained ground last month: Plan A improved more than 1% in November but remains down 2% for the year, while Plan B gained less than 1% and is now even through the first eleven months of 2019:


Stocks gained another 3% in November. 2019 is turning out to be a banner year for stocks, particularly in the US:

Interest rates edged up a few basis points in November, producing flat returns for bonds during the month. For the year, bonds have earned 11%-15%, with long duration and corporate bonds performing best.

Overall, our traditional 60/40 portfolio was up almost 2% during November and is now up 18% so far this year, while the conservative 20/80 portfolio gained less than 1% last month and is up almost 16% through the first eleven months of 2019.


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, 2018 and November 30, 2019, and also shows the (lack of) 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 2019:

Corporate bond yields were a couple basis points higher during November. As a result, pension liabilities were basically unchanged last month and remain up 15%-24% for the year, with long duration plans seeing the largest increases.


Pension finances have held up pretty well this year in the face of all-time low interest rates, thanks to continued strong stock market returns (we provide more in-depth discussion of long-term interest rate trends here and 2019 retirement finance more generally here.) The graphs below show the progress of assets and liabilities for our two model plans through November this year: 

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 were flat again last month. We expect most pension sponsors will use effective discount rates in the 2.9%-3.3% range to measure pension liabilities right now.

The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2019, along with estimates for 2020. 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.