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Pension finances held steady in April, as higher stock markets offset lower interest rates. Both model plans we track [1] improved less than 1% last month. Through the first four months of 2021, Plan A is now up 12%, while the more conservative Plan B has improved 3% this year:
Assets
Stocks built on a solid first quarter with their best month of the year in April. A diversified stock portfolio gained 4% in April and is now up more than 10% for the year:
Interest rates fell by more than 0.10% in April while credit spreads continued to narrow. As a result, bonds gained 1%-3% last month but remain down 4%-7% for the year, with long duration bonds performing worst.
Overall, our traditional 60/40 portfolio gained 3% during April and is now up 4% for the year, while the conservative 20/80 portfolio gained 2% in April and is now down 2% for the year.
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, 2020 and April 30, 2021, and it also shows the movement in the curve last month. The second graph below shows our estimate of movements in effective GAAP discount rates for pension obligations of various duration during 2021 so far:
Corporate bond yields fell more than 0.10% in April, but they remain up more than 0.50% since the end of 2020. As a result, pension liabilities rose 2%-3% during the month and are now down 5%-9% for the year, with long duration plans seeing the largest declines.
Summary
The reversal in interest rates in April put a halt to shrinking pension liabilities this year, but continued strong stock markets enabled plans to protect recent gains in the face of lower rates. The graphs below show the movement of assets and liabilities for our model plans during the first four months of 2021:
Looking Ahead
Pension funding relief was signed into law during March . The new law substantially relaxes funding requirements over the next several years , providing welcome breathing room for beleaguered pension sponsors.
Discount rates moved higher again last month. We expect most pension sponsors will use effective discount rates in the 2.8%-3.3% range to measure pension liabilities right now.
The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2021, along with estimates for 2022, reflecting the new law (ARPA). Pre-relief, both 24-month averages and December ‘spot’ rates, which are still required for some calculations, such as PBGC premiums, are also included.
[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.