US Pension Briefing – May 2023

Key takeaways

  • Pension discount rates rose almost a quarter of a percentage point in May, erasing much of the fall in rates we had seen so far this year.
  • While equity market returns were generally negative, large-cap domestic equities posted positive returns for the month, driven by better-than-expected results from mega-cap companies.
  • While equity market returns coincided with a decline in fixed income indices (and therefore also plan liabilities), May’s change in funded status for most pension plans will show anywhere from a slight to moderate improvement.

May 2023 summary

The Treasury yield curve rose approximately 20 basis points during the month of May, with short-term rates rising even further. With credit spreads on long credit staying relatively flat, corporate bond yields and pension discount rates also rose approximately 20-25 bps, yielding negative returns but also lower plan liabilities.

Worries over a potential US debt ceiling agreement kept equity markets in turmoil, with most indexes ending the month down despite a deal being reached in advance of the deadline.

Despite the market turmoil, most pension plans’ funded status should have seen improvements during the month of May due to the decrease in liabilities outweighing the change in assets. Those plans with larger allocations to all-cap indices (e.g. S&P 500) are likely to have seen bigger improvements for the month, with plans holding more large-cap growth domestic equities gaining the most.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

Source: FTSE Pension Liability Index

Discount rates rose close to 0.25% in May with the FTSE pension discount curve finishing the month at 4.98%, which is approximately where it started the year.  The curve remains under 5.00% for the third month in a row however discount rates are approximately 0.75% higher than they were in May of 2022.  

May 2023 investment returns (%)

Source: Morningstar

Most stock and bond indexes had a negative month in May mostly due to concerns over the US debt ceiling. US equities had a modestly positive return due to earnings growth from the mega-cap technology companies beating expectations. International developed equities lost over 4% in May after having a strong month in April. Fixed income investments also had a strong April, but lost ground in May with Long Treasury bonds declining the most. The 10-year treasury yield ended May at 3.63%, up 18 bps from April. Credit spreads were fairly stable over the month. The price of oil and gold both declined while the US dollar gained strength.


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