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September 2022 Pension Finance Update

Pension finances slipped modestly in September, as the worst month of the year for stocks more than offset the impact of surging interest rates. Both model plans1 we track lost less than 1% last month; for the year, Plan A remains up almost 4%, while the more conservative Plan B is now down more than 1% through the first three quarters of 2022:


All categories of stocks fell substantially last month. A diversified stock portfolio lost more than 9% in September and is now down 26% so far during 2022:

Interest rates increased again last month – Treasury yields increased 0.5% while corporate bond yields increased more than 0.6%. As a result, bonds lost 4%-7% in September, ending the third quarter down 15%-25% for the year, with long duration and corporate bonds performing worst.

The traditional 60/40 portfolio lost 7% during September and is now down 22% for the year, while the conservative 20/80 portfolio lost 6% last month and is also down 21% through the first three quarters 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 September 30, 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 so far during 2022:

Corporate bond yields rose more than 0.6% during September, pushing above 5% for the first time since 2011. As a result, pension liabilities fell 5%-8% last month and are now down 20%-30% for the year, with long duration plans seeing the largest declines.


Between interest rates reaching levels not seen since 2011 and stocks suffering their worst year since 2008, pension finances have actually been pretty stable this year. Pension balance sheets have shrunk around 20% on both the asset and liability side, but overall funded status has held up pretty well. The graphs below show the movement of assets and liabilities during the first three quarters of 2022:

Looking Ahead

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. However, the surge in interest rates this year, if sustained, will reduce or eliminate the impact of funding relief.

Discount rates moved up 0.7% last month, reaching the highest levels seen in a decade. We expect most pension sponsors will use effective discount rates in the 5.2%-5.5% 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.

* October Three estimate, based on rates available as of 9/30/2022.

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