Corporate defined benefit plan funded levels increased during the second 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 4.0% increase in its funded ratio, while a typical liability-driven plan observed a 1.1% 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 11.7%, while a liability-driven plan has improved approximately 3.3%.
Chart 1: Funded Ratio Change: Return-Driven Plan1
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Chart 2: Liability-Driven Plan1
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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 steepening across the curve. The short end of the curve increased approximately 10-20 basis points (bps), while the long end of the curve increased to approximately 18-20 bps. Driving the increased yields was the market softening its stance on the number of rate cuts expected from the Federal Reserve as inflation continues to slowly decline. In isolation, the increase in Treasury yields decreased the liability and caused an increase in funded ratios for pension plans.
Chart 3: Treasury Curve2
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Credit Spreads
Credit spreads had a negative impact on funded status.
Widening credit spreads increased the discount rates and decreased liabilities. Intermediate duration credit spreads slightly widened by 3 bps while long duration credit spreads widened 6 bps. The overall increase 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 12 bps and decreased plan liabilities.
Chart 4: Credit Spreads2
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Equities
Equity market performance had a positive impact on funded status.
Overall positive performance in global equity markets due to strong performance in technology stocks helped funded statuses this quarter despite its rough start, as high inflation as well as the outlook on rate cuts are now seen as being less likely. U.S. small cap stocks lagged U.S. large cap stocks with returns of approximately -3.28% and 4.28%, respectively, while international equities returned around 0.96%.
Chart 5: Equity Index Total Returns2
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1Assumptions
- Data as of 6/30/2024, Source: PNC.
- 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 U.S. Pension Plan AAA-A Corp Indexes with average duration of 13.1 years.
2Data as of 6/30/2024, Source: FactSet®. FactSet® is a registered trademark of FactSet Research Systems Inc. and its affiliates.
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Accessible Version of Charts
Chart 1: Funded Ratio Change: Return-Driven Plan
| Return-Driven | ||||
| Base | Fall | Rise | Change | |
| Beginning of Quarter | 0.0% | 100.0% | 100.0% | |
| Change Due to Treasury Rates | 100.0% | 0.0% | 1.5% | 1.5% |
| Change Due to Credit Spreads | 101.5% | 0.0% | 0.4% | 0.4% |
| Change Due to Equities | 101.9% | 0.0% | 2.1% | 2.0% |
| End of Quarter | 103.9% | |||
Chart 2: Funded Ratio Change: Liability-Driven Plan
| Liability Driven | ||||
| Base | Fall | Rise | Change | |
| Beginning of Quarter | 0.0% | 100.0% | 100.0% | |
| Change Due to Treasury Rates | 100.0% | 0.0% | 0.5% | 0.5% |
| Change Due to Credit Spreads | 100.5% | 0.0% | 0.1% | 0.1% |
| Change Due to Equities | 100.6% | 0.0% | 0.6% | 0.6% |
| End of Quarter | 101.2% | |||
| Maturity | 3/31/2024 | 6/30/2024 | Change (right axis) |
| 1 | 5.01% | 5.12% | 11 |
| 2 | 4.65% | 4.74% | 9 |
| 3 | 4.44% | 4.54% | 10 |
| 4 | 4.31% | 4.42% | 11 |
| 5 | 4.24% | 4.36% | 12 |
| 6 | 4.19% | 4.33% | 14 |
| 7 | 4.16% | 4.31% | 16 |
| 8 | 4.15% | 4.32% | 17 |
| 9 | 4.15% | 4.33% | 18 |
| 10 | 4.16% | 4.35% | 19 |
| 11 | 4.18% | 4.38% | 19 |
| 12 | 4.21% | 4.41% | 20 |
| 13 | 4.25% | 4.45% | 20 |
| 14 | 4.29% | 4.49% | 20 |
| 15 | 4.34% | 4.54% | 20 |
| 16 | 4.39% | 4.58% | 20 |
| 17 | 4.43% | 4.63% | 20 |
| 18 | 4.48% | 4.67% | 19 |
| 19 | 4.52% | 4.71% | 19 |
| 20 | 4.55% | 4.74% | 19 |
| 21 | 4.58% | 4.76% | 19 |
| 22 | 4.59% | 4.77% | 18 |
| 23 | 4.59% | 4.77% | 18 |
| 24 | 4.58% | 4.76% | 18 |
| 25 | 4.55% | 4.73% | 18 |
| 26 | 4.51% | 4.68% | 18 |
| 27 | 4.45% | 4.63% | 18 |
| 28 | 4.38% | 4.55% | 18 |
| 29 | 4.29% | 4.47% | 18 |
| 30 | 4.20% | 4.38% | 18 |
Date |
Intermediate Credit Option-Adjusted (OAS) |
Long Credit Option-Adjusted Spread (OAS) |
3/31/2024 |
0.73 |
1.09 |
4/30/2024 |
0.71 |
1.08 |
5/31/2024 |
0.68 |
1.05 |
6/30/2024 |
0.76 |
1.15 |
Chart 5: Equity Index Total Returns (Cumulative)
| Index | Date | Percent |
| Russell 3000 | 3/31/2024 | 0.00 |
| 4/30/2024 | -4.42 | |
| 5/31/2024 | 0.05 | |
| 6/30/2024 | 3.11 | |
| MSCI ACWI ex USA | 3/31/2024 | 0.00 |
| 4/30/2024 | -1.79 | |
| 5/31/2024 | 1.06 | |
| 6/30/2024 | 0.96 |
