Corporate defined benefit plan funded levels increased during second quarter of 2023. The primary drivers were positive returns in most return-seeking asset classes and a higher discount rate that lowered the liability. A typical return-driven plan had a 5.1% increase in its funded ratio, while a typical liability-driven plan observed a 1.4% increase. Return-driven plans with higher equity allocations saw stronger growth in assets as well as a larger gain in funded status due to higher discount rates. Year to date, the sample return-driven plan funded ratio has improved approximately 6.4%, while a liability-driven plan has improved approximately 2.6%.
Chart 1: Funded Ratio Change: Return-Driven Plan*
Source: PNC; Data as of 6/30/23
*See Assumptions below.
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Chart 2: Funded Ratio Change: Liability-Driven Plan*
Source: PNC; Data as of 6/30/23
*See Assumptions below.
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Treasury Rates
Treasury rates decreased at almost 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 closer to 80 basis points while the long end of the curve increased closer to 15 basis points. Driving the increased yields was the debt ceiling debate and the Federal Reserve’s (Fed’s) “hawkish pause” that signaled potential of additional rate hikes later this 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 6/30/23
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 16 basis points while long duration credit spreads tightened 11 basis points (bps). The 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 6/30/23
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Equities
Equity market performance had a positive impact on funded status.
Overall positive performance in global equity markets, despite U.S. debt ceiling concerns at the beginning of the quarter, helped funded statuses this quarter due to cooling inflation the Fed’s “hawkish pause” and positive economic data. Advances in the Information Technology (IT) sector driven by potential boom in artificial intelligence and related technologies are also contributing to return. In the United States, large-cap stocks outperformed small-cap stocks with returns of approximately 8.7% and 5.2%, respectively. International developed returned around 7.8% due to gains in the Financial and IT sectors, and emerging markets returned around 1.8%.
Chart 5: Equity Index Total Returns*
Source: FactSet®; Data as of 6/30/23
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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 average duration of 14 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 |
1.7% |
| Change Due to Credit Spreads |
-1.0% |
| Change Due to Equities | 4.4% |
| End of Quarter |
105.1% |
Source: PNC; Data as of 6/30/23
Chart 2: Funded Ratio Change: Liability-Driven Plan
| Liability-Driven Plan | Funded Ratio Change |
| Beginning of Quarter |
100% |
| Change due to Treasury Rates |
0.2% |
| Change Due to Credit Spreads |
0.0% |
| Change Due to Equities | 1.2% |
| End of Quarter |
101.4% |
Source: PNC; Data as of 6/30/23
Maturity |
3/31/23 |
3/31/2023 |
Change (right axis) |
1 |
4.61% |
5.00% |
39 |
3 |
3.87% |
4.56% |
69 |
5 |
3.61% |
4.13% |
52 |
7 |
3.49% |
3.88% |
39 |
9 |
3.44% |
3.76% |
32 |
11 |
3.46% |
3.74% |
28 |
13 |
3.52% |
3.78% |
26 |
15 |
3.62% |
3.87% |
25 |
17 |
3.74% |
3.98% |
24 |
19 |
3.89% |
4.07% |
18 |
21 |
3.92% |
4.12% |
20 |
23 |
3.94% |
4.12% |
18 |
25 |
3.90% |
4.05% |
15 |
27 |
3.77% |
3.91% |
14 |
29 |
3.48% |
3.71% |
23 |
Source: FactSet®; Data as of 6/30/23
Date |
Intermediate Credit Option-Adjusted (OAS) |
Long Credit Option-Adjusted Spread (OAS) |
3/31/23 |
1.13 |
1.59 |
4/30/23 |
1.10 |
1.57 |
5/31/23 |
1.11 |
1.61 |
6/30/23 |
0.97 |
1.48 |
Source: FactSet®; Data as of 6/30/23
Chart 5: Equity Index Total Returns (Cumulative)
| Index | Date | Percent |
| Russell 3000 | 3/31/23 | 0.00 |
| 4/30/23 | 1.00 | |
| 5/31/23 | 1.40 | |
| 6/30/23 | 8.30 | |
| MSCI ACWI ex USA | 3/31/23 | 0.00 |
| 4/30/23 | 1.70 | |
| 5/31/23 | -2.00 | |
| 6/30/23 | 2.40 |
Source: FactSet®; Data as of 3/31/23
