- Discount rates increased during February, with the FTSE Pension Liability Index up about 0.35% higher than at the end of January.
- Equity markets declined during February on continued fears of a recession in 2023.
- Funded status for most pension plans increased with liability gains outweighing investment losses.
February 2023 summary
February started with the Fed raising rates by 25 basis points (0.25%) despite strong data that inflation has eased. The 0.25% hike is smaller than the 0.75% and 0.50% hikes over the past year and reflects the Fed’s notion that while inflation may be cooling, it’s still high and the labor market is still relatively strong. The February inflation report showed inflation at levels that were higher than expected which sent market sentiment downward and spreads up. US and global government yields were higher in February and US credit spreads widened modestly with the narrative being that rates will need to remain at higher levels for longer.
Despite the poor investment returns from down equity markets and rising fixed income yields and spreads, pension plan sponsors most likely saw increases to funded status due to liabilities that declined more than investment portfolios. The amount of the increase will largely be dependent on the allocation of assets with larger increases associated with larger allocations to equities.
Discount rates & asset returns
FTSE pension discount rate index last 12 months
Discount rates rose in February, with the FTSE pension discount curve finishing the month slightly over 5.00% matching levels from year-end 2022. The FTSE curve is up nearly 1.7% over a one-year timeframe but still below the 2022 high of 5.51%.
February 2023 investment returns (%)
Equity returns were negative in February for most countries and sectors. The US 10-year Treasury yield ended February at 3.92% as markets priced in more monetary tightening, which led to negative returns for fixed income. Spreads widened modestly over the month besides high yield corporate spreads. The US dollar gained 2.86%, the first month of positive returns since September.