Key takeaways
- Discount rates jumped even higher in the month of April, nearly matching the total increase seen in Q1 2022. This was one of the largest monthly changes in discount rates over the last 25+ years.
- With the continuing war in Eastern Europe, inflation concerns, and ongoing supply chain woes, equity markets tumbled to end the month significantly down.
- Discount rates have risen almost 1.40% in 2022, decreasing pension plan liabilities significantly, but with equity markets having fallen the monthly change in funded status for a given plan will depend heavily on its asset allocation, still most plans will be in a better position than when they started the year.
April 2022 summary
April saw one of the highest ever single-month changes in discount rates in the history of the index which dates back to 1995. The only other times when there were changes that were more dramatic occurred in late 2008/early 2009 (3 times) and once in mid-2003. The change in April was driven by increases in US Treasury rates and widening credit spreads, nearly doubling the year-to-date increases and pushing pension discount rates into territory not seen since late 2018. This is generally good news for plan sponsors as their pension liabilities will decrease, though any liability-matching assets will have fallen as well.
Equity markets, particularly in the US, are fighting many headwinds and ended the month of April anywhere from 6% – 9% down from where they started and have lost more than 12% for the year. The continuing war in Ukraine, high inflation, expected upcoming rate hikes by the Fed, ongoing supply chain woes across the globe, and the resulting weaker-than-expected earnings season all contributed to this performance.
Pension plan assets will have decreased for the month. We expect most plans’ net funded status to have dropped or, at best, remained level. The degree to which a drop in funded status was mitigated will depend heavily on the plan’s return-seeking vs. liability-matching asset allocation.
Discount rates & asset returns
FTSE pension discount rate index last 12 months
Source: FTSE Pension Liability Index
Discount rates increased approximately 0.67% during April, continuing a strong start to 2022. Current rates are now the highest they have been in 3 years, about 1.39% higher than rates at year-end 2021, and up about 1.12% from a year ago. Treasury rates ended the month up all along the curve, but especially at the long end, and credit spreads widened. The FTSE pension discount index finished April at 4.21%.
Investment returns (%)
Source: Morningstar
Global equities fell in April, with US equities falling 9% while developed foreign equities decreased 6.5% and emerging markets by 5.6%. As the conflict in Ukraine remains unresolved, tightening supply chains have caused more upward pressure on commodity and energy prices. Interest rates continue to rise, causing bonds, especially long treasuries, to post negative returns for the fifth consecutive month. Credit spreads widened, most notably in High Yield and Emerging Markets. Gold fell by 2.1% for the month, while the US dollar gained 4.7%.