Pensions enjoyed a strong month in March, due to higher stock markets and higher interest rates. Both model plans we track1 gained ground last month, with Plan A adding almost 3%, ending the quarter up 4%-5%, while the more conservative Plan B gained 1% last month and is now up almost 1% through the first three months of 2022:
Stocks bounced back in March, led by US markets that had dropped the most during January and February. A diversified stock portfolio gained 2% in March, ending the first quarter down 5%-6%:
Interest rates continued to move higher in March, but credit spreads tightened last month; Treasury yields increased 0.3% while corporate bond yields rose 0.2%. As a result, bonds lost another 2%-3% last month, and are now down 6%-10% for the year, with long duration and corporate bonds performing worst.
Overall, our traditional 60/40 portfolio gained a fraction of 1% last month but is still down 6% for the year, while the conservative 20/80 portfolio lost more than 1% in March and is now down more than 7% through the first quarter of 2022.
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 March 31, 2022, and it also shows the movement in the curve last month. The second graph below shows the dramatic increase in effective GAAP discount rates for pension obligations of various duration so far during 2022:
Corporate bond yields moved up another 0.2% last month and are now up 0.8% for the year. As a result, pension liabilities fell another 2%-3% during March are now down 8%-12% for the year, with long duration plans seeing the largest declines.
Overall, pensions enjoyed a strong quarter. Coming on top of a strong 2021, most pension sponsors are looking at significantly better funded plans than fifteen months ago. The graphs below show the movement of assets and liabilities during the first quarter of 2022:
Pension funding relief was signed into law last March, 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.
Discount rates moved 0.2% higher last month. We expect most pension sponsors will use effective discount rates in the 3.4%-3.8% range to measure pension liabilities right now.
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.