An uptick in Treasury rates fueled increases in liability discount rates and higher funded ratios for many U.S. corporate pension plans in the fourth quarter of 2024. While domestic equities posted gains in the final quarter of 2024, global stocks and return-seeking assets generally fell during the same period. Losses from return-seeking assets were offset by lower liabilities driven by rising Treasury rates. Total-return plans saw a significant increase in funded status while LDI-focused plans saw a modest rise due to their hedged position. Estimated discount rates for pension liabilities, based on long-duration fixed-income yields, increased around 61 basis points during the quarter. We estimate the funded status of our total-return plan increased about 6.4%, while our LDI-focused plan experienced a funded status increase of 1.3% in the three months ended December 31.
Rate Movement Commentary
Short- and long-term interest rates increased for the three months ended December 31. During the same period, the 30-year Treasury yield rose 64 basis points to 4.78%. In addition to the rise in yields, there was a drop of eight basis points in long-credit spreads. In the fourth quarter, the uptick in Treasury yields resulted in higher pension discount rates, with the discount rate for the open total-return plan increasing 61 basis points to 5.66% and the discount rate for the frozen LDI-focused plan rising 64 basis points to 5.56% as of December 31.
Plan Sponsor Considerations
Global equities fell in the fourth quarter as the Federal Reserve cut rates by 25 basis points in December. Investment-grade fixed-income markets posted losses across intermediate- and longer-dated maturities as yields moved higher. Performance of credit-oriented fixed-income assets was also negative as Treasury yields increased and credit spreads tightened.
In June, the Department of Labor (DOL) released a report to Congress based on 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 department’s 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 to explore 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 2.4% in the fourth quarter. The MSCI EAFE decreased 8.1% in the three months ended December 31; the MSCI Emerging Market Index declined 8% during the same period.
Treasury yields increased and the yield curve remains inverted across only a few maturities. The 30-year Treasury yield increased 64-basis points in the fourth quarter, resulting in losses of 8.6% for the Bloomberg Long Treasury Index; during the same period, the Bloomberg Long Credit Index decreased 6.3%.
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