Article December 6, 2021

US pension briefing – November 2021


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Key takeaways

  • Discount rates were flat, but the Treasury yield curve changes and credit spread changes paint an interesting picture of what is happening with rates.
  • A new COVID variant wreaked havoc on most equity classes domestically and internationally.
  • Funded status changes in November will largely be plan specific depending on their level of exposure to various equity asset classes and the types of liability matching fixed income asset classes they are invested in.

November 2021 summary

Discount rates took a wild ride through the month of November, plunging significantly in the first two weeks and rebounding to where they started by month-end. The lack of change in rates came about even with the Treasury yield curve down for the month. Credit spreads widened by roughly 10 basis points for longer-term investment grade bonds. With inflation continuing to creep up and a new virus variant circulating the globe, watch for volatility in discount rates and their underlying structure through the holiday season and into 2020.

Fears that effects from the latest pandemic variant could complicate economic recovery produced sizeable dips in equity markets during the month. Large cap US stocks still turned positive results, but the same wasn’t true in mid and small cap stocks and international markets (developed and emerging) took a bigger hit. US government fixed income securities had positive returns due to declining yields, but that wasn’t necessarily true across investment grade or high yield fixed income.

The end result for pension funded status is mixed and highly dependent on a plan’s asset allocation. For most plans with diversified equity portfolios, expect slight declines in funded status even though discount rates remained flat. Plans that have heavy allocations to liability matching investments will hopefully see muted funded status changes, but a lot will depend on their mix of government versus corporate fixed income strategies.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

Discount rates finished the month roughly were they started but took a huge dip during the month highlighting the volatility in rates that we may be in for in the coming months. Treasury rates still ended the month down 5+ basis points at the long end of the curve, but credit spreads widened considerably to make up the difference. Current discount rates are still up almost 0.25% since the end of 2020. The FTSE pension discount index finished November at 2.75%.

November returns (%)

Global equities declined as concerns about the Omicron variant weighed on the economic outlook. US equities ended the month with more resilient results benefitting from strong retail sales and improving employment figures, but results were mixed across large cap, mid cap, and small cap securities.

In fixed income markets, the yield curve flattened, seeing the longest-term US Treasuries yield lower with incremental inflation pressure. Higher quality corporate fixed income posted additional returns while riskier bonds like high yield trailed as their spreads widened. The dollar appreciated due to its status as a safe haven from virus variant uncertainty and also the potential speeding-up of tapering from the Federal Reserve


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Pension plan annuity purchase update - Q3 2021

Pension buyout sales had their strongest quarter since 2013 in Q3 2021, totalling $15.8B in the quarter, an increase of 243% compared to Q3 2020 sales.

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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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