Insights

In January, a rally in public equities fueled gains in the funded status of many corporate pension plans despite falling liability discount rates. However, plans with lower hedge ratios may have experienced declines in funded ratio during the month. The Treasury yield curve declined and remained inverted between the one- and 10-year tenors. Total-return-focused plans experienced mixed results in funded status from lower discount rates and equity gains. Many LDI-oriented plans experienced funded status improvements due to positive equity returns and protection against the reversal in discount rates. NEPC’s hypothetical pension plans witnessed a funded status reduction of 0.1% for the total-return plan compared to a gain of 2.6% for the LDI-focused plan.

Rate Movement Commentary

The Treasury curve declined at tenors greater than one year, and remained inverted from the one- to 10-year tenors. The 10-year yield decreased 35 basis points to 3.52% and the 30-year yield fell 32 basis points to 3.65%. Long-credit spreads tightened 11 basis points and intermediate spreads tightened 12 basis points. The movement in Treasury rates and credit spreads resulted in a decrease in the pension discount rates used to discount pension liabilities. The discount rates for NEPC’s hypothetical pension plans fell 38 basis points with the open total-return plan rate at 4.89%, while the discount rate for the frozen LDI-focused plan was 4.82%.

Plan Sponsor Considerations

Equity and fixed-income markets were largely positive in January. Treasury yields generally declined, and the yield curve remained inverted between the one- and 10-year tenors. This resulted in lower discount rates used for valuing pension liabilities. At NEPC, we anticipate continued market volatility and the potential for market disruption. Plan sponsors should remain diligent about monitoring sources of change in funded status versus expectations as equities and interest rates are likely to remain volatile. This includes closely monitoring hedge ratio ranges to avoid becoming overhedged to interest rates with a flatter yield curve.

Market Environment and Yield Curve Movement

In January, U.S. equities were up 6.3%, according to the S&P 500 Index. Non-U.S. equity markets also delivered a robust performance with international developed markets returning 8.1%, according to the MSCI EAFE Index; emerging market equities gained 7.9%, according to the MSCI EM Index. Globally, the MSCI ACWI Index returned 7.2% in January. The Treasury curve declined last month at tenors greater than one year and remained inverted from the one- to 10-year tenors. This resulted in gains for fixed-income markets, particularly for longer durations. During the same period, the Bloomberg Long Treasury Index was up 6.4% and the Bloomberg Long Credit Index rose 6.7%.