US Pension Briefing – November 2022

Key takeaways

  • Discount rates fell sharply during November, with the FTSE Pension Liability Index down close to 0.50%.
  • Equity markets around the globe were meaningfully up during the month, even though they continue to be down year-to-date.
  • Funded status at the end of the month will be close to where it started, despite the big changes in discount rates and investment returns.

November 2022 summary

Everything continues to be about interest rates. Even though the Federal Reserve raised the Fed Funds Rate another 0.75% in November, discount rates still came down and equity markets were up across the globe. Markets continue to react to every new piece of economic information that is released, trying to anticipate how Central Banks will behave with future rate hikes.

A better-than-expected jobs report coupled with softening inflation numbers had markets repricing future Fed rate expectations which helped to lift equity markets during November. Those movements ended up pushing rates at the long end of the curve down as markets were anticipating a changing pace and duration of rate hikes over the coming months. The Treasury yield curve continues to be inverted, a potential indicator of a looming recession, but that didn’t stop equities from posting solid gains.

Even though equity markets were substantially up, discount rates pulled back sharply as the long end of the yield curve came down and investment grade credit spreads narrowed. This decrease in discount rates will have pushed liabilities markedly up for pension plan sponsors.

The combination of lower discount rates and the corresponding higher liabilities offset by equity and fixed income market gains is leaving pension plan funded ratios at or slightly lower than where they started the month. That said, pension plan sponsors are still most likely better off today than they were at the start of the year which could have a meaningful effect on year-end balance sheets as we get close to the end of 2022.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

Source: FTSE Pension Liability Index

Discount rates decreased in November, with the FTSE pension discount curve finishing the month just below 5.00%. This represents a significant decrease from the end of October when discount rates were around 5.50%. This change was due to both narrowing credit spreads and decreases in Treasury rates, especially at the longer end of the yield curve. Current rates are, however, still up over 2.00% from the beginning of the year.

November 2022 investment returns (%)

Source: Morningstar

Unemployment was weaker than expected and inflation has softened, which helped equities rally both in the US and abroad. The bond market had positive returns in November with long credit bonds performing the best returning 9%. Credit spreads mostly narrowed over the month except for high yield corporate spreads which widened modestly.



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US pension briefing – October 2022
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