US Pension Briefing – January 2023

Key takeaways

  • Discount rates fell during the month of January, with the FTSE Pension Liability Index down about 0.33%.
  • Equity markets were up 7-8% for the month showing a strong start to the year.
  • Liabilities increased with falling discount rates but were offset with strong returns. Funded status was likely little changed for many plans and improved for those that have a significant weighting towards equities.

January 2023 summary

2023 has had a decent start for pension plan sponsors with a well-diversified portfolio.  Even though discount rates pulled back and liability values increased as the long end of the yield curve came down and investment grade credit spreads narrowed, equity markets increased.  Optimism that inflation has peaked, and that the Fed would start to slow down its rate increases pushed equity markets higher and long-term interest rates lower.

While equity markets saw positive returns, which was a welcome change from the many down months of 2022, there are many risks that are causing investors to debate whether a recession will soon ensue. All eyes are on the Fed as it is expected to continue increasing interest rates in 2023 to try to slow down inflation and the overall economy and to do so as a soft landing.  Despite headline layoffs, the January jobs report surprised many with how strong job growth was and unemployment fell to its lowest levels since the 1960s. This good news has investors fearing the Fed may need to raise rates further than expected and is fueling fears of recession.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

Source: FTSE Pension Liability Index

Discount rates pulled back in January, with the FTSE pension discount curve finishing the month under 5.00% to start the year. Even with the decline of approximately 0.30%, the FTSE curve is still up over 1.50% from the start of 2022.

January 2023 investment returns (%)

Source: Morningstar

Markets started 2023 on an optimistic note. Equity markets had a strong month with US equities gaining 6.89%. The bond market also had positive returns with US aggregate bonds gaining 3.08%. Positive market activity was helped with the CPI release showing that inflation is continuing to fall. Rates and credit spreads declined over the month of January, and the US dollar weakened.



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