- Discount rates continued to push higher during March largely due to increases in Treasury yields.
- Even with the war in Eastern Europe, equity markets, while volatile, ended the month in positive territory.
- The significant rise in discount rates so far in 2022, increases which are pushing close to 1% year-to-date, have fueled funded status increases for almost every pension plan sponsor.
March 2022 summary
March proved to be another good month for pension plan funded status as discount rates continued their upward trend primarily due to the rise in US Treasury rates. The Treasury yield curve became increasingly flat during the month with short-term rates increasing by 0.75%+, the 10-year rising over 0.50%, and the 30-year up around 0.30%. March also marked the first expected increase in the Fed Funds Rate by the Federal Reserve, one of several expected rate increases this year aimed at curbing inflation.
Despite the conflict in Ukraine, US markets were still up for the month with the S&P 500 up over 3.0% and even developed international markets posting gains. Volatility remains high with the uncertainty around how the war between Ukraine and Russia will play out and how it will ultimately affect supply chains and global markets.
The combination of higher rates and positive equity markets will produce funded status improvements for almost every pension plan sponsor over the month. Depending on a plan’s allocation to return seeking investments vs. liability matching investments, those improvements could be significant. Even though equity markets are still in negative territory for 2022, the precipitous rise in discount rates should have many plan sponsors in a better funded status position through the first quarter of 2022 compared with the end of 2021.
Discount rates & asset returns
FTSE pension discount rate index last 12 months
Source: FTSE Pension Liability Index
Discount rates increased approximately 0.20% during March, continuing a strong start to 2022. Current rates are about 0.70% higher than rates at year-end 2021 and up about 0.30% from a year ago. Treasury rates ended the month up all along the curve, but especially at the short end. Meanwhile, credit spreads tightened. The FTSE pension discount index finished March at 3.54%.
Investment returns (%)
Overall US equities rose by 3.2% in March after a slow start to 2022, while developed foreign equities gained 0.6% and emerging markets fell by 2.3%. As the conflict in Ukraine remains unresolved, tightening supply chains have caused more upward pressure on commodity, energy, and gold prices. Interest rates rose again this month, causing bonds to post negative returns for the fourth consecutive month. Gold returned 1.5% for the month, while the US dollar outpaced it by 0.2%.