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Pensions enjoyed another positive month in June due to strong stock markets. Both model plans we track[1] gained ground last month: traditional Plan A gained 1%, ending the month up 3% for the year, while the more conservative Plan B gained a fraction of 1% last month, ending the month slightly in the black through the first half of 2025:
Assets
Most stock indexes gained ground last month. A diversified stock portfolio gained more than 4% last month, ending the first half of 2025 up more than 8% for the year:
Interest rates fell almost 0.2% during June. As a result, bonds gained 2% last month. For the year, bonds are up 2%-4%, with long duration corporates lagging.
Overall, our traditional 60/40 portfolio gained 3% last month and is now up 6% so far this year, while the conservative 20/80 portfolio gained 2% last month and is now up 4% through the first half of 2025.
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 June 30, 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:
Long-term corporate bond yields fell 0.2% during June. As a result, pension liabilities rose 2% last month, ending the first half of 2025 up 3% for the year.
Summary
Strong stock returns outpaced liability growth in the first half of 2025. The graphs below show the movement of assets and liabilities so far this year:
Looking Ahead
Sustained higher interest rates since late 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.
Long-term rates moved 0.2% lower last month. We expect most pension sponsors will use effective discount rates in the 5.2%-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.
[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.