US Pension Briefing – December 2023

Key takeaways

  • Pension discount rates continued to fall in December, declining nearly 0.50% for the month to 4.8%. This wraps up the year with discount rates down slightly when comparing year-end 2023 to 2022.
  • As yields fell across the curve, both stocks and bonds throughout the world posted strong returns.
  • Despite the strong market returns, pension funded status outcomes will vary based on each plan’s asset allocation and liability characteristics. We expect that some plans saw improvements in December while others experienced funded status deterioration. Year-over-year, pension plan funded statuses have improved, some meaningfully so, as asset returns in 2023 tended to outpace liability growth.

December 2023 summary

Consistent with November’s trend, the yield on the 10-year Treasury fell another 50bps in December, ending the year roughly where it started. Meanwhile, credit spreads fell to their tightest levels of the year leading to lower year-over-year pension discount rates.

Equities posted their strongest quarter for the year in Q4. Major equity classes returned roughly 4-5% for December. US Large Cap stocks led the rebound in 2023, up 26% for the year.

The combined effect of December’s positive equity returns coupled with falling discount rates will have varied effects on pension plan funded statuses for the month. Shorter duration plans and those with higher allocations to equities most likely saw gains, while underfunded plans with more liability matching assets may have even seen their funded status deteriorate over the month. However, for the year, most pension plans will have experienced funded status improvements. Plans with larger equity allocations generally saw the largest funded status increases.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

Source: FTSE Pension Liability Index

Discount rates continued to slide during the last two months of 2023, decreasing another 0.48% in December, with the FTSE pension discount curve finishing the month at approximately 4.83%.  Discount rates are under 5.00% for the first time since June and finished the year down 0.19%.


US Treasury yield curve 

Source: U.S. Department of the Treasury

The Treasury yield curve shifted lower across all periods for the second month in a row. Once again, the largest shifts came on the long end of the curve with the 30-year and 10-year decreasing by approximately 0.50%. The shift down is attributed to the continued sentiment that the Fed has reached its peak regarding rate hikes and belief that it will begin to cut rates starting at the end of Q1 2024.

December 2023 Investment returns (%)

Source: Morningstar

December was a strong month for both global equities and fixed income. US equities and international developed equities both returned 5.3% over the month. Within US equities, generally all sectors had positive returns in December. Real estate, industrials, and consumer discretionary led the way all returning over 6% with real estate performing the best returning 8.7%. Value stocks outperformed growth stocks, and small cap stocks outperformed large cap stocks. As interest rates continued to decrease in December, fixed income experienced another strong month. Once again, the biggest decreases came on the long end of the yield curve causing the longer duration bonds to perform the best with US Long Treasury Bonds returning 8.6%. The US dollar index lost strength in December, and gold increased by 1.3%.

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