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January 2023 Pension Finance Update

Pension finances improved modestly in January, as higher stock markets more than offset the impact of lower interest rates. Both model plans we track[1] were up about 1% for the month:


Stocks enjoyed a strong month across the board in January. A diversified stock portfolio gained more than 8% last month:

Interest rates fell and credit spreads narrowed last month; Treasury yields declined 0.3% while corporate bond yields fell 0.4% during January. As a result, bonds gained 4%-7% last month, with long duration bonds performing best.

Overall, our traditional 60/40 portfolio gained 6% during January, while the conservative 20/80 portfolio added more than 4%.

[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, 2022, and January 31, 2023. The second graph below shows our estimate of movements in effective GAAP discount rates for pension obligations of various duration during January:

Corporate bond yields fell 0.4% in January. As a result, pension liabilities grew 4%-7% during the month, with long duration plans seeing the largest increases.


If the theme for 2022 was falling stocks and rising interest rates, January saw a reversal of that trend. The net effect is a modest boost for pension finances out of the gate in 2023. The graphs below show the movement of assets and liabilities during January 2023:

Looking Ahead 

Pension funding relief was signed into law during March of 2021, and additional relief was provided by November 2021 legislation. The new laws substantially relaxed funding requirements over the next several years, but the increase in rates seen in the past year has eroded the impact of relief.

Discount rates moved 0.4% lower last month. We expect most pension sponsors will use effective discount rates in the 4.6%-4.9% range to measure pension liabilities right now.

The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2023, along with estimates for 2024. 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 2/3/2023