Taking Stock: NEPC's July 2024 Pension Monitor

In July, pension plan sponsors experienced a decline in liability discount rates amid lower Treasury yields. During this period, positive returns from global public equities offset some funded status losses resulting from lower discount rates. Through the end of July, global public equity returns remained positive year-to-date. The Treasury yield curve declined across most tenors for the month and total-return-focused plans likely saw mixed changes in funded status. NEPC’s hypothetical total-return pension plan declined 0.1% in funded status compared to a 1% increase for our LDI-focused plan.

Rate Movement Commentary

The Treasury yield curve dropped in July, and remained inverted from the one- to 10-year tenors. The 10-year yield decreased 27 basis points to 4.09%, while the 30- year yield ticked down 16 basis points to 4.35%. Corporate bond spreads were largely unchanged for the month and remain tight relative to historical levels.

The movement in Treasury rates and credit spreads resulted in lower pension discount rates used to value pension liabilities. The discount rates for NEPC’s hypothetical pension plans decreased about 14 basis points to 5.36% for the open total-return plan, while the discount rate for the frozen LDI-focused plan dropped 17 basis points to 5.27%.

Plan Sponsor Considerations

In July, global public equities experienced modest gains and long-dated fixed-income debt were in the black fueled by lower Treasury rates. Treasury yields declined last month across most maturities, while credit spreads remained largely unchanged. At NEPC, we anticipate continued market volatility and the potential for market disruption. Plan sponsors should remain diligent about monitoring sources of change in funded status versus expectations, as equities and interest rates are likely to remain volatile. This includes closely monitoring interest rate hedge ratios to avoid becoming overhedged to longer-maturity rates with a changing yield curve.

Market Environment and Yield Curve Movement

U.S. equities returned 1.2% in July, according to the S&P 500 Index. During the same period, non-U.S. equities also experienced gains with international developed markets up 2.9%, according to the MSCI EAFE Index. Emerging market equities underperformed and were up a modest 0.3% last month, according to the MSCI EM Index. Broadly, global equities returned 2.1% during the month, according to the MSCI ACWI Index. In July, the Treasury curve decreased from the previous month and remained inverted from the one- to 10-year tenors. This generally resulted in positive performance for investment-grade fixed-income markets, with long-credit fixed income and long Treasuries performing similarly. During the month, the Bloomberg Long Treasury Index increased 3.6% and the Bloomberg Long Credit Index was up 3.1%.