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Higher stock markets improved pension finances in January for both model plans we track[1]. Traditional Plan A improved more than 1% last month, while the more conservative Plan B gained a fraction of 1%:
[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 up across the board in January. A diversified stock portfolio gained almost 3% last month:
Interest rates were flat in January, producing gains of less than 1% for bonds last month. Overall, our traditional 60/40 portfolio gained 2% in January, while the conservative 20/80 portfolio gained 1%.
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 January 31, 2025. The second graph below shows our estimate of movements in effective GAAP discount rates for pension obligations of various duration during January:
As Corporate bond yields were essentially unchanged in January. As a result, pension liabilities rose less than 1% during the month.
Summary
In its own modest way, January represents another incremental step in the extraordinary run of improved pension finances seen for most of the past decade, The graphs below show the movement of assets and liabilities during January 2025:
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 seeing higher required contributions for the next few years.
Discount rates were unchanged last month. We expect most pension sponsors will use effective discount rates in the 5.3%-5.6% range to measure pension liabilities right now.
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 “floor” that applies to the 24-month average rates under funding relief for each segment.