US pension briefing – December 2020
- Global equities posted a solid month to close out the year, up anywhere from 4% - 8%, with small cap and international developed markets seeing the largest gains; for 2020 as a whole, US equity markets ended the year up 15% - 19%, with international equities posting high single digit returns.
- Pension discount rates were basically flat during December, up only 0.02% during the month, leaving the total discount rate decline relative to year-end 2019 at approximately 0.70%.
- With rates flat and equities up, December was a good month for pension plan funded status – after a tumultuous 2020, plans with significant US equity exposure will likely finish off 2020 in a better position than they began.
December 2020 summary
While many around the world were quite keen to put 2020 in the rearview mirror, equity investors will view 2020 as a good albeit volatile year. With solid returns posted across various equity markets in December, US markets closed out the year up 15% - 19%. Small-cap stocks once again outperformed large cap in December, as they did in November; while small cap stocks had notably trailed large cap stocks earlier in the year, the Russell 2000 was up 8.5% in December, substantively erasing the gap between large cap and small cap stocks for 2020.
Fixed income investment returns were close to flat in December, with coupons largely being offset by the effect of changes in yield. Treasury yields rose slightly during the month, but credit spreads continued to tighten, leading to only small changes in overall investment-grade credit yields. High-yield fixed income benefitted more from the improvement in credit conditions, with gains of almost 1.9% for the month.
The offsetting effects of rising Treasury rates and shrinking credit spreads meant that pension discount rates were largely unchanged from the end of November. This brings a volatile year for pension liabilities to a quiet end; while liabilities will have increased noticeably during 2020 due to the decrease in interest rates, the month of December was kind to pension sponsors, with no corresponding increase in pension liabilities to offset the good news from equity markets. For the year, these two competing forces will play out differently depending on pension liability and investment profiles. Plans with both liability-aware fixed income and US equity exposure will likely see funded status improvements from year-end 2019, while plans with shorter duration fixed income and a more global equity portfolio may see their funded status lower than one year ago.
Discount rates & asset returns
FTSE Pension Discount Rate Index - December 2020
Discount rates stayed relatively flat increasing by a meager 0.02% in December. However, due to decreasing rates through most of 2020, current rates are still down approximately 0.70% since year end 2019 and 1.70% since year end 2018. The FTSE pension discount index finished December at 2.52%.
December returns (%)
Even with rising Covid-19 infection and death rates, global equities surged in response to the news of several vaccine approvals and by the $900 billion US stimulus package. The momentum for value and small cap stocks remained strong. Interest rates remained at very low levels while credit spreads narrowed causing higher risk fixed income like high yield to post gains.
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