US Pension Briefing – December 2022

Key takeaways

  • Discount rates were up slightly for the month, but meaningfully up year-over-year.
  • Equity markets were down again for the month and for the year (the S&P 500 had its worst year since 2008).
  • While funded status most likely deteriorated in December, most plan sponsors will be in significantly better position at the end of 2022 than they were at the beginning of the year.

December 2022 summary

Despite the rocky road in the markets, 2022 proved to be a positive for many pension plan sponsors. At the forefront was the significant rise in discount rates that rose to levels that we haven’t seen since 2011. Pension plan sponsors will have seen their liabilities shrink considerably due to the rise in rates, with the FTSE pension discount curve up by more than 2.00% over the calendar year.

Equity markets were down during 2022, with the S&P 500 posting its worst year since 2008. Much of the equity market sentiment was driven by inflation and geopolitical concerns. Despite these worries, the US labor market continued to be strong, however that also meant more aggressive Central Bank policies to try to curb inflation at the same time. These factors and many of the major economic metrics point towards higher probabilities of recessions occurring around the world. Those fears continue to roil the equity markets.

Even though equity markets were down significantly in 2022, pension plan funded status has likely improved significantly on an economic basis for many plan sponsors. The rapid rise in discount rates and the corresponding decrease in liabilities was enough to overcome losses from equity markets. While this improvement may be counterintuitive given headline news, looking towards 2023 plan sponsors will want to take account of how to protect these improvements and build off of them going forward.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

Source: FTSE Pension Liability Index

Discount rates increased slightly in December, with the FTSE pension discount curve finishing the month just above 5.00% to end the year. For 2022, this puts the increase in discount rates up over 2.00% from the beginning of the year. The last time the FTSE pension discount curve moved more than 1.00% in a calendar year was 2011.

December 2022 investment returns (%)

Source: Morningstar

The Fed raised rates again in December. The 0.50% increase was lower than the recent hikes of 0.75%, but it raised the projection for peak Fed Funds rate to 5.00-5.25%. This contributed to equity market volatility with the US equity market ending down 5.86% over the month. The bond market had negative returns in December with Long Treasury Bonds performing the worst. Credit spreads modestly widened with Bank Loan spreads widening the most by 0.15%.



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