Corporate defined benefit plan funded levels increased during first quarter of 2024. The primary drivers were higher discount rates that decreased the liability and positive returns in most return-seeking asset classes. A typical return-driven plan had a 7.7% increase in its funded ratio, while a typical liability-driven plan observed a 2.2% increase. Return-driven plans with higher equity allocations saw a larger increase in funded status due to higher equity returns. Year to date, the sample return-driven plan funded ratio has improved approximately 7.7%, while a liability-driven plan has improved approximately 2.2%.
Chart 1: Funded Ratio Change: Return-Driven Plan
Source: PNC; Data as of 3/31/24
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Chart 2: Funded Ratio Change: Liability-Driven Plan
Source: PNC; Data as of 3/31/24
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Treasury Rates
Treasury rates increased at all points along the curve and had a positive impact on funded status.
During the quarter, the Treasury curve increased, with overall flattening across the curve. The short end of the curve increased approximately 20-40 basis points (bps) while the long end of the curve increased approximately to 25-35 bps. Driving the increased yields was the Federal Reserve possibly delaying rate cutes until middle of the year. In isolation, the increase in Treasury yields decreased the liability and caused an increase in funded ratios for pension plans.
Chart 3: Treasury Curve
Source: FactSet®; Data as of 3/31/24
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 8 bps while long duration credit spreads tightened 8 bps. The overall decline in spreads was driven by economic data that surprised to the upside. On a net basis, considering increasing Treasury yields, the total corporate bond discount rate for pensions increased approximately 25 bps and decreased plan liabilities..
Chart 4: Credit Spreads
Source:FactSet®; Data as of 3/31/24
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Equities
Equity market performance had a positive impact on funded status.
Overall positive performance in global equity markets due to rally in technology stocks, helped funded statuses this quarter despite lower expectations for federal reserve cuts in 2024. In the United States, Small Cap stocks lagged Large Cap stocks with returns of approximately 10.2% and 5.1%, respectively, while International equities returned around 4.7%.
Chart 5: Equity Index Total Returns
Source: FactSet®; Data as of 3/31/24
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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 3/31/24
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 3/31/24
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 3/31/24
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 3/31/24
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 3/31/24
