Pension Finance Update December 2025

Pension finances improved in December due to higher interest rates, ending 2025 at their high point for the year. Both model plans we track[1] gained ground last month: traditional Plan A improved 1%, ending the year up 7%, while the more conservative Plan B gained a fraction of 1% last month, ending 2025 up almost 2% for the year:

Assets

Stocks were mixed in December; a diversified stock portfolio earned a thumping 21% during 2025, led by overseas markets:

Bond yields jumped about 15 basis points during December, ending the year modestly lower at short durations and moderately higher at very long durations. As a result, bonds lost 1%-2% last month. For the year, bonds gained 5%-6%, with short duration corporates doing best.

Overall, our traditional 60/40 portfolio lost a fraction of 1% last month, ending the year up 14%, while the conservative 20/80 portfolio also lost a fraction of 1% last month, ending 2025 up more than 8% 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, 2024 and December 31, 2025 (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 2025:

Corporate bond yields rose 15 basis points during December, ending the year lower at short durations and a bit higher at very long durations. As a result, pension liabilities fell 1% last month, ending the year up 6%-7%, with short duration plans seeing the largest increases.

Summary

The end of 2025 marks seven consecutive years of improved pension finances, easily the best run during the first quarter of the 21st century. The graphs below show the movement of assets and liabilities for our two model plans during the year:

Looking Ahead

Sustained interest rates above 5% since 2022 have substantially diminished the impact of pension funding relief since 2023. Underfunded plans are likely seeing higher required contributions for the next few years, despite improved pension balance sheets.

Interest rates moved higher last month. We expect most pension sponsors will use effective discount rates in the 5.2%-5.6% range for December 31 financial disclosures.

The table below summarizes rates that calendar-year plan sponsors are required to use for IRS funding purposes for 2025, along with estimates for 2026, including the rate “corridor” that applies to the 24-month average rates under funding relief for each segment.

[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.