Corporate defined benefit plan funded levels decreased during fourth-quarter 2023.The primary drivers were lower discount rates that increased the liability, which were offset by positive returns in most return-seeking asset classes.A typical return-driven plan had a 3.2% decrease in its funded ratio, while a typical liability-driven plan observed a 0.3% decrease.Return-driven plans with higher equity allocations saw a larger loss in funded status due to lower discount rates.Year to date, the sample return-driven plan funded ratio has improved approximately 8.2%, while a liability-driven plan has improved approximately 3.1%. 

Chart 1: Funded Ratio Change: Return-Driven Plan

Source: PNC; Data as of 12/31/23

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Chart 2: Funded Ratio Change: Liability-Driven Plan

Source: PNC; Data as of  12/31/23

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Treasury Rates

Treasury rates decreased at all points along the curve and had a negative impact on funded status.

During the quarter, the Treasury curve decreased, with overall flattening across the curve.The short end of the curve decreased approximately 65-80 basis points (bps) while the long end of the curve increased closer to 70 bps.Driving the decreased yields was the Federal Reserve (Fed) stopping interest rate hikes for the rest of 2023 and anticipated rate declines in 2024. In isolation, the decrease in Treasury yields increased the liability and caused an decrease in funded ratios for pension plans. 

Chart 3: Treasury Curve

Source: FactSet®Data as of 12/31/23

FactSet® is a registered trademark of FactSet Research Systems Inc. and its affiliates.

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Credit Spreads

Credit spreads had a negative impact on funded status. 

Tightening credit spreads decreased discount rates and increased liabilities. Intermediate duration credit spreads tightened 21 bps while long-duration credit spreads tightened 16 bps.The overall decline in spreads was driven by economic data that surprised to the upside. On a net basis, considering decreasing Treasury yields, the total corporate bond discount rate for pensions decreased approximately 85-90 bps and increased plan liabilities.

Chart 4: Credit Spreads

Source:FactSet®; Data as of 12/31/23

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Equities

Equity market performance had a positive impact on funded status.

Overall positive performance in global equity markets despite the market correction in October helped funded statuses this quarter. The performance was driven by improvement in inflation data and the Fed’s dovish comments resulting in strong returns in November and December. In the United States, large-cap stocks lagged small-cap stocks with returns of approximately 11.7% and 14.0%, respectively, while international equities returned around 9.7%. 

Chart 5: Equity Index Total Returns

Source: FactSet®; Data as of 12/31/23

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Assumptions

  • The funded ratio changes are for generic plans with allocation and liability profiles specified below. Results are market driven and do not incorporate any plan-specific effects, such as benefit payments, expenses, benefit accruals, or plan contributions. Funded ratio changes are sensitive to the beginning of the period funded ratio.
  • A return-driven plan is a pension plan with an asset allocation commonly associated with an absolute return-objective and has a high allocation to return-seeking assets (public equity in this case) and typically has high funded status volatility. Assumed asset allocation is 70% MSCI All Country World, 30% Bloomberg Aggregate.
  • A liability driven plan is one that is well along its path in a liability-centric approach to investing and has a large allocation to long-duration bonds to help reduce funded status volatility. Assumed asset allocation is 20% MSCI All Country World, 64% Bloomberg Long Credit, 16% Bloomberg Long Government.
  • Liability profile is based on BAML Mature/Average US Pension Plan AAA-A Corp Indexes with an average duration of 13 years.

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Accessible Version of Charts

Chart 1: Funded Ratio Change: Return-Driven Plan

Return-Driven Plan Funded Ratio Change
Beginning of Quarter
100%
Change due to Treasury Rates
-8.3%
Change Due to Credit Spreads
-1.7%
Change Due to Equities 6.8%
End of Quarter
96.8%

Source: PNC; Data as of 12/31/23

Chart 2: Funded Ratio Change: Liability-Driven Plan

Liability-Driven Plan Funded Ratio Change
Beginning of Quarter
100%
Change due to Treasury Rates
-1.8%
Change Due to Credit Spreads
-1.4%
Change Due to Equities -1.9%
End of Quarter
99.7%

Source: PNC; Data as of 12/31/23

Chart 3: Treasury Curve

Maturity

9/30/23

12/31/2023

Change (right axis)

1

5.44%

4.79%

65

3

4.85%

4.06%

79

5

4.63%

3.89%

74

7

4.56%

3.86%

70

9

4.57%

3.87%

70

11

4.62%

3.90%

72

13

4.71%

3.96%

75

15

4.81%

4.03%

78

17

4.91%

4.11%

80

19

4.99%

4.18%

81

21

5.03%

4.23%

80

23

5.01%

4.24%

77

25

4.94%

4.22%

72

27

4.80%

4.15%

65

29

4.60%

4.04%

56

Source: FactSet®Data as of 12/31/23

Chart 4: Credit Spreads

Date

Intermediate Credit Option-Adjusted (OAS)

Long Credit Option-Adjusted Spread (OAS)

9/30/23

1.02

1.33

10/31/23

1.11

1.37

11/30/23

0.89

1.14

12/31/23

0.81

1.17

Source: FactSet®Data as of 12/31/23

Chart 5: Equity Index Total Returns (Cumulative)

Index Date Percent
Russell 3000 9/30/23 0.00
  10/31/23 -2.70
  11/30/23 6.30
  12/31/23 11.90
MSCI ACWI ex USA  9/30/23 0.00
  10/31/23 -4.10
  11/30/23 4.50
  12/31/23
9.80

Source: FactSet®Data as of 12/31/23