Insights

Decreases in Treasury rates fueled a reduction in liability discount rates and lower funded ratios for many U.S. corporate pension plans in the fourth quarter of 2023. Equities rallied in December and return-seeking assets contributed to an improvement in funded ratios; but those gains were offset by increases in liabilities driven by falling Treasury yields. During the quarter, global equity markets rose sharply as inflation eased and the Federal Reserve kept rates steady during the three months ended December 31, 2023. Estimated discount rates for pension liabilities, based on long-duration fixed-income yields, declined approximately 85 basis points. We estimate the funded status of our total-return plan decreased 2.9%, while our LDI-focused plan experienced a funded status increase of 3.3% in the fourth quarter.

Rate Movement Commentary

Short- and long-term interest rates moved lower for the three months ended December 31. The 30-year Treasury yield decreased 70 basis points in the fourth quarter to 4.03%. In addition to the decrease in yields, there was a 16-basis point decline in long-credit spreads. During this period, lower Treasury yields resulted in a decrease in pension discount rates, with the rate for the open total-return plan decreasing 84 basis points to 5.05% and the discount rate for the frozen LDI-focused plan falling 85 basis points to 4.98% as of December 31.

Plan Sponsor Considerations

Equity and fixed-income markets were in the black in the fourth quarter of 2023. Despite their robust performance, the recent market environment has been challenging for plan sponsors as declining interest rates have generally been a headwind for plan funded status. Notably, long-term interest rates decreased by over 1% as of year-end from peak 2023 levels. Total-return plans may want to consider the impact of rate declines on plan liabilities and the role of LDI in light of such events. For certain plan sponsors, lower rates may increase liabilities and reduce funded status, which could lead to higher required contributions and PBGC variable-rate premiums. NEPC consultants are available to discuss the impact and cost of various pension finance and derisking strategies.

Market Environment and Yield Curve Movement

U.S. equities gained 11.7% in the fourth quarter of 2023. Non-U.S. developed market stocks modestly underperformed the U.S. as the MSCI EAFE increased 10.4% during the quarter; the MSCI Emerging Market Index rose 7.9% during the same period.

Treasury yields decreased and the yield curve remained inverted. The 30-year Treasury yield was 70-basis points lower for the quarter, resulting in a total return of 12.7% for the Bloomberg Long Treasury Index. During the same period, the Bloomberg Long Credit Index returned 13.7%.