Strong gains from public equities and other return-seeking assets improved funded ratios for LDI-focused corporate defined benefit plans for the three months ended September 30. Returns from equities were offset by increases in liabilities driven by declining Treasury yields and modestly tighter credit spreads for total return focused plans. Estimated discount rates for pension liabilities, based on long-duration fixed-income yields, dropped around 52 basis points during the quarter. We estimate the funded status of our total-return plan remained relatively flat, with a decrease of 0.6%, while our LDI-focused plan experienced a funded status increase of 2% in the third quarter.
Rate Movement Commentary
Short- and long-term interest rates decreased for the three months ended September 30. During the same period, the 30-year Treasury yield fell 37 basis points to 4.14%. In addition to the drop in yields, there was a drop of seven basis points in long-credit spreads. In the third quarter, lower Treasury yields resulted in a decrease in pension discount rates, with the discount rate for the open total-return plan falling 45 basis points to 5.05% and the discount rate for the frozen LDI-focused plan dropping 52 basis points to 4.92% as of September 30.
Plan Sponsor Considerations
Global equities, with U.S. large-cap stocks leading the charge, rallied in the third quarter as the Federal Reserve cut rates by 50 basis points in September. Investment-grade fixed-income markets posted gains across intermediate- and longer-dated maturities as yields moved lower. Performance of credit-oriented fixed-income assets was also positive as Treasury yields declined and credit spreads tightened.
In June, the Department of Labor (DOL) released a report to Congress, a request made under the SECURE 2.0 Act of 2022. This report thoroughly reviewed the efficacy of DOL Interpretive Bulletin 95-1 in the current pension risk transfer market. The Employee Benefit Security Administration was tasked with determining if changes are necessary to the departments’ guidelines when plan sponsors evaluate and select an annuity provider for defined benefit plans. In the report, the DOL did not propose any changes regarding DOL 95-1 and found that the bulletin’s current factors are still relevant from a prudent fiduciary perspective when a plan sponsor evaluates annuity providers. The report recommends that the Department continues exploring developments in the life insurance industry and in pension risk transfers to determine whether some of the bulletin’s factors need revision or supplementation and if additional guidance should be developed.
Market Environment and Yield Curve Movement
U.S. equities gained 5.9% in the third quarter. The MSCI EAFE increased 7.3% in the three months ended September 30; the MSCI Emerging Market Index rose 8.7% during the same period.
Treasury yields decreased and the yield curve remained inverted across some maturities. The 30-year Treasury yield decreased 37-basis points in the third quarter, resulting in gains of 7.8% for the Bloomberg Long Treasury Index; during the same period, the Bloomberg Long Credit Index increased 8.1%.
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