US pension briefing – February 2021
- Pension discount rates continued increasing in February, and are up almost 0.50% so far in 2021, which means lower liabilities for pension plan sponsors.
- Equity market returns were positive across the board, riding on positive COVID-19-related news.
- As a result, most pension plans will see at least modest improvements in their funded status for the month. Those with higher equity allocations will see the largest improvements.
February 2021 summary
Pension discount rates maintained their upward momentum, closing the month yet another 0.25% higher from the end of January, which should yield another 2-3% liability decrease for a typical pension plan. At approximately 3.0%, this is the highest that discount rates have been since the end of March 2020, when credit spreads had significantly widened and boosted these rates.
Equity returns for February were positive, with domestic indices up for both the month and year. This was driven by positive COVID-19 vaccine news, expectations of additional fiscal stimulus, and commentary from the Fed indicating they don’t expect inflation to reach their targets in the near term. Returns were particularly strong in the small and mid-cap sectors, bolstered by an additional COVID-19 vaccine being authorized by the FDA for emergency use.
Overall, most pension plans should see their funded statuses improve for the month, particularly those with higher equity allocations. The combination of lower liabilities and positive equity returns will be welcome news to many plan sponsors. And while the potential pension funding relief legislation introduced in January has not yet been written into law, it is expected to be sometime in March, which would provide some much-needed relief and flexibility to many plan sponsors’ cash contribution requirements.
Discount rates & asset returns
FTSE Pension Discount Rate Index - February 2021
Discount rates continued the strong start to 2021 by increasing another 0.26% in February. Current rates are now up almost 0.50% since the end of 2020 and up around 0.25% from this time last year. Discount rates are now the highest they have been since March 2020. The FTSE pension discount index finished February at 3.00%.
February returns (%)
Global equity markets closed the month with positive returns boosted by accelerating vaccination programs. The US was the best performer followed by other developed countries and emerging markets had a small but positive return. The US yield curve steepened driven by higher inflation expectations, with the longer-dated treasury yields rising and reaching pre-pandemic levels. More risky investments like high yield outperformed safer fixed income options.
R&M pension news
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