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December 2022 Pension Finance Update

 2022 was a rough year for stock markets – the S&P 500 lost more than 18%, the index’s worst showing in 14 years and the fourth worst year since 1950 – and yet, pension finances held up pretty well, buoyed by the largest increase in interest rate seen since at least 1980. The two model plans1 we track saw mixed experience in 2022: Plan A ended the year up more than 5% despite losing 4% in December, while Plan B lost 1% during December, ending the year down less than 1%:  


 Stocks fell broadly in December, capping the worst year for the stock market since 2008. A diversified stock portfolio lost 5% last month and 20% during 2022:  

Interest rates edged higher last month, ending an historic year which saw rates increase from below 3% at the end of 2021 to 5% or more at the end of 2022. As a result, bonds lost almost 1% during December and 15%-25% for the year, the worst performance in more than 40 years, with long duration and corporate bonds performing worst. 

The traditional 60/40 portfolio lost more than 3% during December and more than 18% for the year, while the conservative 20/80 portfolio lost more than 1% last month, also ending the year down more than 18%. 

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.


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, 2021 and December 31, 2022, and it also shows the movement in the curve last month. The second graph below shows the change in effective GAAP discount rates for pension obligations of various duration during 2022: 

Corporate bond yields rose less than 0.1% during December, ending 2022 more than 2% above where they began the year. As a result, pension liabilities fell less than 1% last month and a whopping 17%-27% for the year, with long duration plans seeing the largest declines. 


2022 was the year of the great shrinking pension balance sheet, with many plans seeing both assets and liabilities contract around 20%. While a “typical” plan likely enjoyed improvement in funded status this year, 2022 experience will vary more than usual based on asset allocation (stock selection, bond credit quality and duration, absolute return allocation) and liability profile (duration, cash balance vs. annuity). The graphs below show the movement of assets and liabilities during 2022: 

Looking Ahead 

Pension funding relief was signed into law in March 2021 and additional relief was provided by November legislation. The new laws substantially relax funding requirements over the next several years, providing welcome breathing room for beleaguered pension sponsors. However, the surge in interest rates this year, if sustained, will reduce or eliminate the impact of funding relief, and 2022 experience will translate to lower FTAPs (ERISA funding ratios) and higher required contributions in 2023 for most sponsors. 

Discount rates edged up modestly in December and the yield curve remains flat right now. We expect most pension sponsors will use effective discount rates in the 5.0%-5.2% range to measure pension liabilities at the end of 2022. 

The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2022, along with estimates for 2023. Pre-relief, both 24-month averages and December ‘spot’ rates, which are still required for some calculations, such as PBGC premiums, are also included. Note that 24-month average rates will produce liabilities well above “market” rates in 2023. 

* October Three estimate, based on rates available as of 12/31/2022