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Pension Finance Update – December 2021

Pension finances improved in December due to higher stock markets and higher interest rates. Both model plans we track 1 gained ground last month: Plan A improved almost 2% in December, ending the year up 11%, while the more conservative Plan B gained less than 1% last month, ending 2021 up 3%. Overall, 2021, was the best year for pensions since 2013 and the second-best year this century.


Stocks were mostly up last month, led by the S&P 500. A diversified stock portfolio gained 2% in December, ending 2021 with an 18% return for the year:

Interest rates edged 0.05% higher, producing losses of less than 1% on bond portfolios in December. Bonds ended the year down 2%-3%, with long duration bonds performing worst.

Overall, our traditional 60/40 portfolio gained 1% during December, ending the year up more than 8%, while the conservative 20/80 portfolio was flat in December and ended 2021 up almost 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, 2020 and December 31, 2021, and it also shows 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 2021:

Corporate bond yields rose about 0.05% during December. As a result, pension liabilities fell less than 1% last month, ending the year down 2%-3%, with long duration plans seeing the largest declines.


Higher stock prices and higher interest rates are the perfect combination for pension finance and the explanation for double-digit improvement in pension funding ratios this year. Frozen plan sponsors in particular should be alert to the possibility that their plans are now at or near full funding. The graphs below show the movement of assets and liabilities for our model plans during what was an outstanding year:

Looking Ahead

Pension funding relief was signed into law during 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 were up about 0.05% in December. We expect most pension sponsors will use effective discount rates in the 2.6%-3.0% range to measure pension liabilities right now.

The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2021, along with estimates for 2022, reflecting the new laws (ARPA and IIJA). Pre-relief, both 24-month averages and December ‘spot’ rates, which are still required for some calculations, such as PBGC premiums, are also included.

* October Three estimate, based on rates available as of 12/30/2021.

What to Read Next

Annuity Purchase Update – January 2022

Despite the persistence of the pandemic, it is clear that the outlook for plan sponsors in 2021 is remaining positive. Generally, plan funding statuses in 2021 have improved and annuity purchase prices have declined.