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2024 marked yet another strong year for pension finances, capping the strongest 5 and 10 year runs this century. Experience for both model plans we track[1] were mixed in December but positive for the year: the traditional Plan A improved less than 1% last month, ending the year up 11%, while the conservative Plan B lost a fraction of 1% in December, ending 2024 up 2% 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.
Assets
Stocks were mostly lower in December but generally enjoyed strong 2024 returns. A diversified stock portfolio lost 3% last month, ending 2024 up almost 17% for the year, with US stocks leading the way:
Treasury yields jumped more than 0.40% in December, while credit spreads narrowed 0.10%, ending 2024 in record low territory. As a result, bonds lost 3%-5% during December, ending the year up 1% to down 4%, with short duration corporate bonds performing best.
Overall, our traditional 60/40 lost 3% last month, ending 2024 up 9%, while the conservative 20/80 also lost 3% last month, ending 2024 up 2% 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, 2023 and December 31, 2024 (along with 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 2024:
Corporate bond yields rose more than 0.30% in December. As a result, pension liabilities fell 2%-4% last month. For the year, rates increased more than 0.50%, defying expectations. As a result, pension liabilities were flat to down 4% in 2024, with long duration plans enjoying the best experience.
Summary
Pension finances have been improving steadily for a decade, and 2024 was no exception. Most pension sponsors are seeing improved funded ratios again this year. The graphs below show the movement of assets and liabilities during 2024:
Looking Ahead
Sustained higher interest rates since late 2022 have substantially diminished the impact of pension funding relief during 2023, 2024, and 2025. Underfunded plans are likely to see higher required contributions in the next few years.
Discount rates for corporate financial reporting moved higher last month. We expect most pension sponsors will use effective discount rates in the 5.3%-5.6% range to measure pension liabilities on their balance sheets at right now. Current rates are the highest year-end rates seen in 15 years.
The table below summarizes rates that calendar-year plan sponsors are required to use for IRS funding purposes for 2024, along with estimates for 2025. Pre-relief, both 24-month averages and December ‘spot’ rates, are also included.