US pension briefing – July 2022

Key takeaways

  • Discount rates decreased during July, the first time this year, ending the month down about 0.35%.
  • Equity markets rebounded, helping recover much of June’s loss, but are still significantly down for the year.
  • This month’s change in funded status will depend heavily on a plan’s specific asset allocation, but in general, the movement should be relatively small and most likely favorable to plan sponsors.

July 2022 summary

The Treasury yield curve continued its flattening in July with short-term yields gaining significantly and medium to long-term yields falling, inverting between the 1-Year and 10-Year. Credit spreads shrunk significantly, yielding a net decrease of approximately 0.35% in pension discount rates, which will have raised pension liabilities.

July saw the S&P 500 recover everything it lost in June, with international equity markets ending the month positive but still down from two months ago. Indices have fallen approximately 15% year-to-date, and we expect market volatility to continue as the Fed combats high inflation and talks of recession weigh on everyone’s minds.

With liabilities, fixed income portfolios, and equity markets all up for the month, the change in funded status for pension plan sponsors depends on their specific asset allocation, although we expect most will have improved with investments outperforming the liability increases.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

Source: FTSE Pension Liability Index

After months of steady increases over the first half of 2022, interest rates declined sharply throughout July with the FTSE pension discount curve finishing the month at 4.13%, a 0.35% decrease from the end of June. However, current rates are still up 1.30% from the beginning of the year. Meanwhile, treasury rates also decreased in July, particularly on the longer end of the curve and credit spreads tightened.

July 2022 investment returns (%)

Source: Morningstar

Over the month of July, equity returns were generally positive with US equities gaining 9.4% and international developed equities gaining 5%. Emerging market equities lost 0.25%. Credit spreads narrowed over the month with high yield corporate spreads decreasing by roughly 100 basis points. The price of oil has dropped below $100 per barrel to $98.62. Bond returns were positive in July, with high yield bonds performing the best returning 5.9%. The US dollar strengthened by 1.2%, while gold fell by 2.3%.

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