Corporate defined benefit plan funded levels increased during fourth-quarter 2022 despite lower discount rates that increased the liability. The primary driver was positive returns in most return-seeking asset classes. The positive return more than offset the increase in liability due to lower discount rates. A typical return-driven plan had a 3.0% increase in its funded ratio, while a typical liability-driven plan observed a 1.0% increase. Return-driven plans with higher equity allocations saw stronger growth in assets and funded status improvements. Year to date, the sample return-driven plan funded ratio has improved approximately 12.7%, while a liability-driven plan has improved approximately 2.5%.
Chart 1: Funded Ratio Change: Return-Driven Plan*
Source: PNC; Data as of 12/31/22
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Chart 2: Funded Ratio Change: Liability-Driven Plan*
Source: PNC; Data as of 12/31/22
*This example is for illustrative purposes only. The results in this example are based on the stated assumptions. Results have inherent limitations because they are not based on actual transactions, and hypothetical results may under or over compensate for the impact of certain economic and market factors, all of which can adversely affect results. Past performance is no guarantee of future results.
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Assumptions
- The funded ratio changes displayed above 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 indices with average duration of 13 years.
Treasury Rates
Treasury rates increased all along the curve and had a positive impact on funded status.
During the quarter, the Treasury curve increased and twisted. Treasuries increased in the short end, ranging from approximately 10-50 basis points (bps), decreased approximately 5-15 bps in the middle, and increased approximately 0-30 bps at the long end of the curve. In isolation, the increase in Treasury yield decreased the liability and caused an increase in funded ratios for pension plans.
Chart 3: Treasury Curve
Source: FactSet®; Data as of 12/31/22
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 2 bps while long-duration credit spreads tightened 39 bps. On a net basis, considering increasing Treasury yields, the total corporate bond discount rate for pensions decreased 15-25 bps and increased plan liabilities.
Chart 4: Credit Spreads
Source:FactSet®; Data as of 12/31/22
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Equities
Equity market performance had a positive impact on funded status.
Overall positive performance in global equity markets helped funded statuses this quarter due to stronger-than-expected earnings, cooling inflation and belief that the Federal Reserve may start to slow down interest rate hikes. In the United States, large-cap stocks outperformed small-cap stocks with returns of approximately 7.2% and 6.2%, respectively. International developed returned around 14.3% and emerging markets returned around 8.5%. .
Chart 5: Equity Index Total Returns
Source: FactSet®; Data as of 12/31/22
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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 |
0.5% |
| Change Due to Credit Spreads |
-4.0% |
| Change Due to Equities | 6.6% |
| End of Quarter |
103.0% |
Source: PNC; Data as of 12/31/22
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 |
-1.1% |
| Change Due to Equities | 1.9% |
| End of Quarter |
101.0% |
Source: PNC; Data as of 12/31/22
| Maturity | 9/30/2022 | 12/31/2022 | Change (right axis) |
| 1 | 4.32% | 4.73% | 41 |
| 3 | 4.29% |
4.42% |
13 |
| 5 | 4.11% |
3.99% |
-12 |
| 7 | 3.90% |
3.86% |
-4 |
| 9 | 3.76% |
3.79% |
3 |
| 11 | 3.72% |
3.80% |
8 |
| 13 | 3.77% |
3.85% |
8 |
| 15 | 3.88% |
3.95% |
7 |
| 17 | 4.02% |
4.06% |
4 |
| 19 | 4.13% |
4.16% |
3 |
| 21 | 4.19% |
4.23% |
4 |
| 23 | 4.18% |
4.25% |
7 |
| 25 | 4.08% |
4.20% |
12 |
| 27 | 3.90% |
4.08% |
18 |
| 29 | 3.65% |
3.89% |
24 |
Source: FactSet®; Data as of 12/31/22
| Date | Intermediate Credit Option-Adjusted (OAS) | Long Credit Option-Adjusted Spread (OAS) |
9/30/22 |
1.23 |
1.96 |
10/31/22 |
1.33 |
1.91 |
11/30/22 |
1.18 |
1.74 |
12/31/22 |
1.04 |
1.56 |
Source: FactSet®; Data as of 12/31/22
Chart 5: Equity Index Total Returns (Cumulative)
| Index | Date | Percent |
| Russell 3000 | 9/30/22 | 0.00 |
| 10/31/2022 | 8.20 | |
| 11/30/2022 | 13.70 | |
| 12/31/2022 | 7.00 | |
| MSCI ACWI ex USA | 9/30/2022 | 0.00 |
| 10/31/2022 | 2.90 | |
| 11/30/2022 | 14.90 | |
| 12/31/2022 | 13.90 |
Source: FactSet®; Data as of 12/31/22
