Key takeaways

• Discount rates went up, then down ending the monthly right where they started.
• Equities had an OK month, with international markets up slightly and US markets typically down.
• Funded status didn’t change much at all over the course of the month for most plan sponsors.

May 2022 summary

Discount rates remained volatile during May, initially continuing their upward momentum only to scale back to where they started by the end of the month. These higher discount rates continue to provide welcome relief to pension plan sponsors in the form of lower liabilities.

Developed and emerging market equities reversed course from April, ending May in positive territory. While the S&P 500 index was in positive territory for the month, other indices for large, mid, and small cap stocks were flat or slightly negative.

So far in 2022, discount rates are up almost 1.50% while equity returns have posted double-digit losses. It may be surprising, but the combination of these two economic outcomes has generally been favorable for pension plan sponsors. The main driver for the positive results is the decreases in pension liabilities due to the higher discount rates. Dependent on a number of factors, pension liabilities change anywhere from 8% - 15%+ for every 1% move in discount rates. Given the increases in discount rates, the decreases to liabilities have typically outweighed the decline in assets resulting in improved funded status in 2022.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

Source: FTSE Pension Liability Index

Discount rates continued increasing in early May before pulling back during the second half of the month and ending the month almost where they started. Current rates are the highest they have been in 3 years, about 1.40% higher than rates at year-end 2021, and up about 1.15% from a year ago. Treasury rates ended the month up along the short end of the curve, but the long end remained relatively flat; credit spreads were up during the month as well. The FTSE pension discount index finished May at 4.22%.

May 2022 Investment returns (%)

Source: Morningstar

Although it was a volatile month, global equities ended the month little changed, with US equities falling 0.13% while developed foreign equities increased 0.75% and emerging markets increased by 0.44%. Oil and energy prices continue to rise due to supply concerns related to Russia’s ongoing invasion of Ukraine. Credit spreads widened, most notably in High Yield and Bank Loans. US Long Gov’t/Credit bonds and US Long Treasury bonds declined while US Aggregate, US High Yield, and US Long Credit bonds posted positive returns. Gold fell by 3.14% for the month, while the US dollar fell 1.17%.