Pension Finance Update August 2023

Pension finances slipped during August, as falling stock markets outweighed higher interest rates. Both model plans we track(1) lost ground last month: our traditional Plan A lost 1% but remains up 8% for the year, while the more conservative Plan B lost a fraction of 1%, remaining up almost 2% for the year through August:

Stocks suffered their worst month of the year so far during August, with all major indexes falling. A diversified stock portfolio lost 3% last month but remains up 16% through the first eight months of 2023:

Interest rates moved almost 0.2% higher in August. As a result, bonds lost 1%-2% last month. For the year, a diversified bond portfolio is now flat to up 2%, with short duration corporate bonds doing best.


Overall, both plans we track lost ground last month: Plan A lost 2% during August but remains up 9% for the year, while Plan B also lost 2% last month, ending August up more than 3%.

(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 August 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 increased 0.2% during August. As a result, pension liabilities fell 1%-2%, ending the month up 1%-2% for the year.


While August was a step backward for pension finance, 2023 continues to shape up as another good year for pension sponsors, with stock markets mostly holding on to double-digit returns while interest rates have moved even higher this year. The graphs below show the movement of assets and liabilities during the first eight months of 2023:

Looking Ahead

Pension funding relief was signed into law in 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 5.2%-5.4% range to measure pension liabilities right now.

The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 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 8/31/2023