US Pension Briefing – January 2024

Key takeaways

  • Pension discount rates reversed their 2-month slide and increased modestly during January.
  • Equity returns were mixed, and while generally positive had pockets of negative returns depending on different sectors and styles.
  • Most pension plans should have experienced a small increase in funded status driven primarily by liability gains.

January 2024 Summary

Pension liabilities decreased 1.5% – 2% with rising discount rates in January, partially reversing the trend over the prior two months. The rise in discount rates was a result of increases in the Treasury yield curve, particularly at the long end, which was spurred by news that the Fed would likely maintain the Fed Funds rate at current levels for the foreseeable future. Coupled with the rise in rates was a general increase in credit spreads which would have pushed up discount rates as well.

While US equities provided modest positive returns overall, performance was a mixed bag and varied by sector with large cap stocks outperforming small cap stocks and growth stocks outperforming value stocks. Outside of US equities, most other asset classes experienced negative returns, including emerging market equities and fixed income assets.

Liability decreases due to discount rate changes should drive modest funded status gains for most pension plans. Plans with higher allocations to US equities may see greater improvements, however that will be highly dependent on their tactical allocations to various sectors and styles.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

Source: FTSE Pension Liability Index

Discount rates reversed course after a two-month slide that took average rates from just about 6% to under 5%. During January discount average discount rates rose 0.18%. While an 0.18% increase is the smallest month to month change since August it is indicative of volatility in the discount rate yield curve

US Treasury yield curve 

Source: U.S. Department of the Treasury

The Treasury yield curve shifted higher across generally all periods in January. The largest increases came at the long end of the curve as the 30 year rate increased by 0.19%. The 10 year rate increased by 0.11%. All other maturities moved by less than 0.10%. The Fed held the Fed Fund Rates steady in January and hinted that a March rate cut is unlikely due to lack of confidence that inflation has been extinguished entirely.

January 2024 Investment returns (%)

Source: Morningstar

In the first month of 2024, equity markets experienced mixed results. US equities posted a gain of 1.1% and international developed equities returned 0.6%. Emerging markets struggled in January, losing 4.6%. Within US equities, there were mixed results on a sector level. The communications and information technology sectors performed the best returning 5.0% and 4.0% respectively. The real estate and materials sectors performed the worst returning -4.7% and -3.9% respectively. Large cap stocks outperformed small cap stocks and growth stocks outperformed value stocks. Fixed income saw negative returns in January as interest rates rose over the month. With the largest rate increases coming at the long end of the yield curve, long duration bonds performed the worst falling by 2.2%. High yield bonds were flat over the month. Credit spreads generally widened over the month with high yield spreads widening by 0.20%.

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