A typical return-driven plan[1] had a 9.1% decline in its funded ratio, while a typical liability-driven plan[2] observed a 4.8% decline. Liability-driven plans with higher allocations to longer duration assets tend to see smaller funded ratio movements when market volatility increases. According to our analysis, declines in the equity markets had the largest impact on pension funded ratios. Interest rate declines that increased liabilities were partially offset by widening credit spreads. Despite strong performance in the first three quarters, fourth quarter performance brought overall funding levels slightly down for the entire year.

Funded Ratio Change: Return-Driven Plan

Funded Ratio Change: Liability-Driven Plan


  • 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.
  • Return-driven plan allocation: 70% MSCI All Country World, 30% Barclays Aggregate.
  • Liability-driven plan allocation: 30% MSCI All Country World, 56 % Barclays Long Credit, 14% Barclays Long Government.
  • Liability profile is based on BAML Mature/Average U.S. Pension Plan AAA-A Corp indexes with average duration of 14 years.

Treasury Rates

Treasury rates declined & lowered funded ratios as liabilities increased

Treasury Curve

Source: BAML US Treasury Curve

The Treasury curve shifted down and primarily steepened during the quarter, following several quarters of flattening. Intermediate term rates declined as much as 45 basis points (bps) while the 30-year rate declined close to 15 bps. The Federal Reserve (Fed) completed another 25-bps rate hike in December, bringing the federal funds target rate to 2.5%. Despite the rate hike, rates along the yield curve (except for extremely short rates) declined as investors shifted to safe assets during a volatile quarter. 

Credit Spreads

Widening credit spreads reduced liabilities and helped offset funded status losses

Credit Spreads

Source: Barclays Live

Credit spreads widened during the quarter as investors shifted out of corporate bonds into safer Treasury assets. Intermediate and long credit spreads widened 42 and 47 bps, respectively. In isolation, this widening led to higher discount rates which reduced liabilities. On a net basis, total corporate bond discount curves were up around 3 bps. The total impact of rates and spreads were negative on the funded status, with better performance for assets with higher Treasury allocations versus credit.


Sharp drops in equity markets reduced plan funding levels

Equity Index Total Returns

Source: Russell, MSCI

Negative equity market performance reduced plan assets and resulting funding levels. Broad U.S. and international equities posted double-digit declines during the quarter. Emerging markets was the best performing sector but still posted negative returns. Equity market declines were driven by investor concerns over economic slowdown, Fed policy, and ongoing trade negotiations.

For more information, contact Kimberlene Matthews, Director of Pension Solutions, at 312-338-8138 or kimberlene.matthews@pnc.com.