US Pension Briefing – October 2023

Key takeaways

  • Pension discount rates increased again in October, climbing to over 6.0% for the first time since early 2010.
  • Similar to September, October also saw negative returns for equities and fixed income.
  • Pension plans that were less than 100% rate hedged, on the whole, maintained or slightly improved their funded status, as asset declines were slightly less than liability decreases.

October 2023 summary

The rise in long-term bond yields can primarily be attributed to stronger than expected market resilience. It is expected that the Federal Reserve Bank will hold off an additional rate increases in the short-term to see if the large increase in rates over the last few months slows inflation. 

The global equity market decline was primarily due to investor expectations that the Federal Reserve’s inability to continue to fight inflation with interest rate increases without causing meaningful slowing of the economy. US equities have still seen an increase of around 9% year-to-date despite the declines in September and October.

The additional increases in discount rates in October decreased pension liabilities by around 3.5% – 6.0%. These decreases were largely offset by the negative returns for both equities and fixed income across the board. Even with those investment losses, many pension plans are expected to see a modest improvement in their funded status.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

Source: FTSE Pension Liability Index

Discount rates increased 0.35% in October, with the FTSE pension discount curve finishing the month just over 6.01%. Discount rates have increased almost a full 1.00% since July and have been trending upwards since June. With the large increase in rates in October, the FTSE curve finished the month above 6.00% for the first time since March 2010.

US Treasury yield curve 

Source: U.S. Department of the Treasury

The Treasury yield curve shifted higher at the long end once again in October. The shift in rates was largely attributable to the market sentiment that the Fed may raise interest rates one more time before year end if progress on inflation stalls. The greatest moves were at the 5-to-30 year portion of the curve, which remains inverted, although less so compared with the first of the year-2.65.

October 2023 Investment returns (%)

Source: Morningstar

Equities and fixed income had another tough month in October, both having negative returns. US equities were down 2.65% over the month, and international equities lost 4.05%. Within US equities, utilities was the only sector with positive returns for the month. Energy and consumer discretionary were the sectors that detracted the most from performance returning -5.97% and -4.47% respectively. Health care, materials, and industrials also hurt performance with all three sectors losing close to 3%. Growth stocks modestly outperformed value stocks for the month.

With rates rising, fixed income had negative returns in October with long credit bonds performing the worst. Credit spreads widened for the month, with high yield spreads widening the most. The US Dollar gained 0.4% while gold rose by 6.9%.

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