US pension briefing – September 2022

Key takeaways

  • Discount rates increased sharply during September, ending the month at levels we haven’t seen in over a decade.
  • Equity returns were sharply negative for the month. Similarly, U.S. treasuries and corporate bonds posted losses for the month given the rise in rates.
  • Pension plans with equity exposure may see a modest decline in funding this month given the steep market fall in September, though much of the decline may have been offset by a decrease in liabilities due to rising interest rates.

September 2022 summary

The Treasury yield curve continued to rise in September, with intermediate-term yields gaining significantly. In a continued attempt to combat inflation, the Fed hiked interest rates by another 0.75% to reach a target rate of 3.00% to 3.25%. With discount rates up around 0.69% in September, plan sponsors can expect that their liabilities saw a meaningful decline over the month.

Equity markets continued to struggle in September with major US and international market indices falling more than 9%. Year-to-date losses for most of these indices are now above 25%. Credit spreads also widened during the month as persistent global inflation and ongoing interest rate hikes have investors concerned about the potential for an upcoming recession. Pension plans with moderate to high equity exposure may experience a marginal decline in funded status coming out of September, but a nearly 0.70% rise in discount rates will result in a sizable decline in liability values, which should benefit all plans significantly.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

Source: FTSE Pension Liability Index

Discount rates increased significantly again in September, with the FTSE pension discount curve finishing the month at 5.17%, a 0.69% increase from the end of August and the highest the curve has been in over a decade. Current rates are up 2.34% from the beginning of the year. Meanwhile, Treasury rates also increased significantly in September, particularly on the shorter end of the curve, while credit spreads widened.

September 2022 investment returns (%)

Source: Morningstar

A combination of rising rates and growing concerns of recession hindered market performance and almost every asset class was in negative territory during September. A third consecutive rate hike of 0.75% from the Fed put more pressure on the bond market and consequently, bond returns were negative over the month. The Fed’s hawkish stance continued to support the US dollar with the dollar index gaining 2.64%. Credit spreads widened in September mostly due to the rise in rates. The 10-year treasury yield also continued to rise peaking just short of 4.00% and ending the month at 3.80%.

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