Insights

In November, pension plan sponsors experienced significantly lower liability discount rates as interest rates reversed course, falling from year-to-date highs. During this period, global public equities also posted strong gains, while the Treasury yield curve declined across most tenors. Total-return-focused plans likely experienced mixed changes in funded status due to lower discount rates offset by strong equity performance. NEPC’s hypothetical total-return pension plan experienced a decline of 1.9% in funded status compared to an increase of 2.9% for the LDI-focused plan.

Rate Movement Commentary

The Treasury yield curve decreased by around 50 basis points in November, and remained inverted from the one- to 10-year tenors. The 10-year yield fell 51 basis points to 4.37%, while the 30-year yield decreased 50 basis points to 4.54%. Rates across the yield curve have now fallen on a year-to-date basis.

The movement in Treasury rates and credit spreads resulted in lower pension discount rates used to discount pension liabilities. The discount rates for NEPC’s hypothetical pension plans decreased about 66 basis points to 5.59% for the open total-return plan, while the discount rate for the frozen LDI-focused plan was down around 65 basis points to 5.53%.

Plan Sponsor Considerations

Public equities posted strong gains in November, and long-dated fixed-income markets also recorded robust returns due to a decline in Treasury rates. Treasury yields fell in November with the yield curve shifting lower. A modest contraction in credit spreads also contributed to 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 longer-maturity rates with a flatter yield curve.

Market Environment and Yield Curve Movement

In November, U.S. equities gained 9.1%, according to the S&P 500 Index. During the same period, non-U.S. equities performed similarly to U.S. stocks with international developed markets gaining 9.3%, according to the MSCI EAFE Index. Emerging market equities were up 8%% last month, according to the MSCI EM Index. Broadly, global equities rose 9.2% during the same period, according to the MSCI ACWI Index.

In November, the Treasury curve decreased by approximately 50 basis from the previous month at tenors 10 and greater and remained inverted from the one- to 10-year tenors. This resulted in gains for fixed-income markets, with long-credit fixed income experiencing modestly higher gains compared to long Treasuries. During the month, the Bloomberg Long Treasury Index rose 9.2% and the Bloomberg Long Credit Index returned 10.5%.