Taking Stock: NEPC's Q1 2023 Pension Monitor

Returns from growth-oriented assets fueled increases in the funded status of most U.S. corporate pension plans in the first quarter of 2023. In this period, capital markets improved, offsetting potential declines in funded status resulting from modestly lower long-term interest rates. During the quarter, the Federal Reserve hiked rates by 50 basis points. Estimated plan liability discount rates, based on long-duration fixed-income yields, were lower in the first quarter and contributed to higher liabilities. Still, strong asset returns led to funded status gains for the three months ended March 31. The funded status of a total return plan rose 2.8%, and the LDI-focused plan experienced a funded status increase of 3.7%.

Rate Movement Commentary

Short-term interest rates moved higher for the three months ended March 31. Conversely, longer-term interest rates moved slightly lower as the 30-year Treasury yield decreased 30 basis points during the quarter to 3.67%. Long-credit spreads widened by two basis points. Lower Treasury yields in the first quarter resulted in a decrease in discount rates, with the rate for the open total-return plan dropping 22 basis points to 5.05% and the discount rate for the frozen LDI-focused plan decreasing 24 basis points to 4.96% as of March 31.

Plan Sponsor Considerations

Equities were largely positive in the first quarter of 2023 and fixed-income markets experienced gains as a result of declines in interest rate. Plan sponsors may find the current market environment challenging as equity and fixed-income markets remain volatile. While long-term interest rates are lower year-to-date, the increase in rates in 2022 and strong equity market returns this year provide an opportunity for total-return plans to (re)consider LDI to better meet objectives. For certain plan sponsors, higher-funded status levels are also providing a tailwind in the form of required lower contributions and declining PBGC variable-rate premiums. NEPC consultants are available to discuss the benefits and cost of various pension finance and de-risking strategies.

Market Environment and Yield Curve Movement

U.S. equities gained 7.5% in the first quarter of 2023. Non-U.S. developed market stocks outperformed the U.S. as the MSCI EAFE returned over 8% during the quarter; MSCI Emerging Market Index returned 4% in the same period.

Treasury yields decreased slightly and the yield curve remained inverted. The 30-year Treasury yield was 30 basis points lower for the quarter, resulting in a gain of 6.2% for the Barclays Long Treasury Index; in this period, the Barclays Long Credit Index posted returns of 5.4%.