Key takeaways
- Discount rates rose sharply, ending a 5-month streak of declines and reducing pension liabilities.
- Major asset classes across the board ended the month with negative returns.
- Depending on liability duration, funded status, and equity exposure pension plans may have seen anywhere from slight decreases in funded status (shorter duration, more fixed income exposure) to increases on the order of magnitude of 0.5% – 2.0% (average duration, more equities, underfunded).
October 2024 summary
US Treasury yields rose significantly in October, with the largest increases occurring at the mid- and long-termmaturities. This rise led to a substantial increase in discount rates, though tightening credit spreads partially mitigated this effect. Rising discount rates reversed about half of the cumulative decline seen over the preceding five months. Pension liabilities will generally have decreased between 2.5% and 5.0% in October, depending on plan characteristics.
Fixed income securities generally posted negative returns due to rising interest rates, which partially offset decreases in pension liabilities. This impact was most pronounced with US Government securities, while losses on high–yield debt were smaller due to tightening credit spreads.
Equity markets also experienced negative returns in October, largely driven by investor concerns about growth risks, uncertainty about the US election, and inflation. Both international developed markets and emerging markets sawworse equity performance than US markets.
The combination of declining liabilities and negative asset returns likely resulted in minimal change in funded status for pension plans that are shorter duration and have higher allocations to fixed income. Plans with larger allocations to US equities, as well as underfunded plans, most likely saw funded status improvements anywhere from 0.50% to 2.00%.
Discount rates & asset returns
FTSE pension discount rate index last 12 months
Discount rates rose sharply during October, increasing by 0.32% and breaking a 5–month streak of consecutive decline. Despite the increase, rates remain significantly lower than they were one year ago.
US Treasury yield curve
The Treasury yield curve shifted higher across all maturities except the 3-month in October. The largest shifts occurred in the 3, 5, and 7-year maturities, which rose by 0.54%, 0.57%, and 0.54%. Notably, the yield curve continues its normalization. The next Fed meeting will be held in November, and the Fed has indicated that a 0.25% rate cut can be expected.
October 2024 Investment returns (%)
Global equities fell in October, with US equities falling 0.73% while international developed equities decreased 5.44% and emerging markets by 4.45%. This was driven primarily by investor concerns about growth risks, as well as uncertainty with respect to the US election. In the Euro area, hotter-than-expected inflation along with weak activity and employment data contributed to the negative returns. Emerging Markets were hurt by weak corporate results in India and uncertainty over support measures in China. Within US Equities, Financials and Communication Services were leaders, with respective gains of 2.69% and 1.94%. Health Care was the worst performing sector, losing 4.62%. Fixed Income experienced negative returns as interest rates rose, with long-duration bonds taking larger losses than short-duration bonds. The US Dollar Index rose 3.18%, and the price of gold gained 2.72%. Credit spreads tightened relative to August month end.