Pension Finance Update May 2025

Pensions roared back in May on the strength of higher stock markets and higher interest rates. Both model plans we track[1] gained ground last month: traditional Plan A gained 4%, ending the month up more than 1% for the year, while the more conservative Plan B gained 1% last month, ending the month even through the first five months of 2025:

Assets

Stocks rose strongly across the board last month, gaining 6% and ending the month up almost 4% for the year through May:

Treasury rates rose 0.25% during May, while corporate bond yields were up more than 0.10%. As a result, bonds lost 1%-2% last month. For the year, bonds are flat to up 2%, with long duration corporates lagging.

Overall, our traditional 60/40 portfolio gained 3% last month and is now up almost 3% so far this year, while the conservative 20/80 portfolio also gained 1% last month and is now up 2% through the first five months 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 May 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:

Long-term corporate bond yields rose 0.12% during May. As a result, pension liabilities fell by about 1% last month but remain up 1%-2% through the first five months of 2025.

Summary

Strong stock returns and higher interest rates have pushed pensions back into the black for 2025. The graphs below show the movement of assets and liabilities during the first five months of 2025:

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 0.1% higher last month. We expect most pension sponsors will use effective discount rates in the 5.3%-5.7% 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.