Corporate defined benefit plans funded levels increased during fourth-quarter 2021, as positive equity returns were partially offset by lower Treasury rates. A typical return-driven plan had 3.0% increase in its funded ratio, while a typical liability-driven plan observed a 1.2% increase. Liability-driven plans with higher allocations to longer duration assets tend to see smaller funded ratio movements when market volatility increases. Year to date, return-driven plans are still ahead 15% while liability driven plans are up 4%.

Chart 1: Funded Ratio Change: Return-Driven Plan*

Source: PNC; Data as of 12/31/21

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Chart 2: Funded Ratio Change: Liability-Driven Plan*

Source: PNC; Data as of 12/31/21

*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 an average duration of 16 years.

Treasury Rates

Treasury rates fell in the long end and had a negative impact on funded status.

During the quarter, the Treasury curve flattened as investors reacted to increased pace of tapering, rising inflation and expectations for more rate hikes in 2022. The decline in longer rates were driven by concerns of economic recovery due to COVID-19. Treasuries with maturities shorter than seven years showed increases ranging from 16-33 basis points (bps) while longer term Treasury rates showed decreases ranging from approximately 10-25 bps. In isolation, the decrease in Treasury yield increased the liability and caused a decrease in funded ratios for pension plans.

Chart 3: Treasury Curve

Source: BAML US Treasury Curve; Data as of 12/31/21

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Credit Spreads

Credit spreads had a positive impact on funded status.

Credit spreads had a positive but minimal impacts on funded ratios during the quarter. Both intermediate and long-duration credit spreads widened 7 bps. On a net basis, considering decreasing Treasury yields, the total corporate bond discount rate for pensions decreased 5 bps and increased plan liabilities.

Chart 4: Credit Spreads

Source: Barclays Live; Data as of 12/31/21

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Equities

Equity market performance had a positive impact on funded status.

Overall positive performance in global equity markets driven by strong earnings growth helped funded statuses this quarter. The result is positive returns globally with domestic returns outpacing international returns. In the United States, small-cap stocks trailed large caps with returns of 2.1%, while large caps returned 9.7%. International developed returned around 2.7% and emerging markets returned around -1.3%. Supply chain constraints and the impact of the Omicron variant continue to be topics of concern.

Chart 5: Equity Index Total Returns

Source: Russell, MSCI Data as of 12/31/21

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Ready to Help

For more information, contact Kimberlene Matthews, FSA, EA, CFA, Managing Director, Pension & Enterprise Solutions, at kimberlene.matthews@pnc.com.


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
-2.5%
Change Due to Credit Spreads
0.9%
Change Due to Equities 4.6%
End of Quarter
103.0%

Chart 2: Liability-Driven Plan

Return-Driven Plan Funded Ratio Change
Beginning of Quarter
100%
Change due to Treasury Rates
-0.7%
Change Due to Credit Spreads
0.6%
Change Due to Equities 1.3%
End of Quarter
101.2%

Chart 3: Treasury Curve

Maturity 9/30/2021 12/31/2021 Change (right axis)
1 0.09% 0.43% 42.1
3 0.56% 1.00% 44
5 1.02% 1.28% 26
7 1.32% 1.40% 8
9 1.50% 1.46% -4
11 1.62% 1.53% -9
13 1.73% 1.62% -11
15 1.83% 1.72% -11
17 1.94% 1.83% -11
19 2.04% 1.92% -12
21 2.13% 1.99% -14
23 2.19% 2.03% -16
25 2.21% 2.02% -19
27 2.20% 1.98% -2
29 2.14% 1.91% -25

Chart 4: Credit Spreads

Date Intermediate Credit Option-Adjusted (OAS) Long Credit Option-Adjusted Spread (OAS)
9/30/2021 0.54 1.23
10/31/2021 0.57 1.23
11/30/2021 0.69 1.35
12/31/2021 0.61 1.30

Chart 5: Equity Index Total Returns (Cumulative)

Index Date Percent
Russell 3000 9/30/2021 0.0
  10/31/2021 2.39
  11/30/2021 -2.22
  12/31/2021 1.82
MSCI ACWI ex USA 9/30/2021 0.00
  10/31/2021 6.74
  11/30/2021 5.07
  12/31/2021 9.17

For an in-depth look:
Pension Market Review