Article February 4, 2021

US pension briefing – January 2021


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Key takeaways

  • Pension discount rates started the year strong, increasing roughly 0.20% in January which means lower liabilities for pension plan sponsors.
  • Equities experienced a quiet month relative to the last few. Fixed income investments were generally down, corresponding to the increase in interest rates. Pension plan returns for the month will depend largely on the plan’s equity make-up, with minimal to negative returns expected for most plans.
  • Combining interest rate and investment market movements, most pension plans will see their funded status improve for the month but only modestly.

January 2021 summary

Pension plans welcomed increasing interest rates in January with discount rates trending up toward the mid-2% range. This translates to a liability decrease of 2-3% for a typical pension plan.

Plans with modest to significant fixed income investments will have a relatively flat funded status for the month, as plan liabilities and assets decreased slightly together.

Equity returns in January varied with most broad markets flat or down slightly both in the US and abroad. Emerging markets and US Small Caps had another strong positive month, however, returning 3.1% and 5.0% respectively. Plans with more significant equity holdings will generally see a funded status improvement driven mainly by decreasing liabilities rather than by equity returns.

Overall it was a relatively quiet month for pension plans. Many plan sponsors are cautiously optimistic that interest rates will continue their upward trend or at least hold steady. There is also renewed optimism for legislated funding relief for pension plan sponsors, as a bill was re-introduced in the U.S. House of Representatives on January 21¹. If passed, it would provide much needed relief to pension plan sponsors in the way of more flexible contribution requirements at a time when interest rates remain near historical lows.

Discount rates & asset returns

FTSE Pension Discount Rate Index - December 2020

Discount rates started 2021 off strong by increasing 0.22% in January. However, due to decreasing rates through most of 2020, current rates are still down approximately 0.17% since this time last year and 1.33% from two years ago. The FTSE pension discount index finished December at 2.74%.


December returns (%)Over the month, developed markets including the US cooled down from previous elevated valuations, as concerns of delays to supply vaccines arose. Emerging market equities significantly outperformed, driven by recovering demand and a moderate wave of Covid-19 infections. In bond markets, high yield and emerging market bond spreads slightly widened. Yields on longer term treasuries continued to increase and the yield curve steepened. With these movements, fixed Income generally decreased in value over the month.

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¹Emergency Pension Plan Relief Act (EPPRA) of 2021 (H.R. 423)


SECURITY INDICES: This presentation includes data related to the performance of various securities indices.  The performance of securities indices is not subject to fees and expenses associated.  Investments cannot be made directly in the indices.   The information provided herein has been obtained from sources which River and Mercantile LLC believes to be reasonably reliable but cannot guarantee its accuracy or completeness.
CONFIDENTIAL:  For addressee use only, not to be disclosed to any other person without express consent from River and Mercantile LLC.  Past performance cannot be relied upon to predict future results.  River and Mercantile LLC is an investment advisor registered with the US Securities and Exchange Commission.

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