Corporate defined benefit plan funded levels decreased during the third quarter of 2024. The primary drivers were lower discount rates that increased the liability partially offset by positive returns in most return-seeking asset classes. A typical return-driven plan had a 2.1% decrease in its funded ratio, while a typical liability-driven plan observed a 0.8% decrease. Return-driven plans with higher equity allocations saw a larger decrease in funded status due to a larger impact of falling discount rates on the liability. Year to date, the sample return-driven plan funded ratio has improved approximately 9.5%, while a liability-driven plan has improved approximately 2.6%. .
Chart 1: Funded Ratio Change: Return-Driven Plan1
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Chart 2: Funded Ratio Change: Liability-Driven Plan1
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Treasury Rates
Treasury rates decreased at all points along the curve and had a negative impact on funded status.
During the quarter, the Treasury curve decreased, with overall steepening across the curve. The short end of the curve decreased approximately 80-115 basis points (bps), while the long end of the curve decreased approximately 30-35 bps. Driving the decreased yields was the Federal Reserve’s 50 bps single rate cut in September due to falling inflation and cooling of the labor market. In isolation, the decrease in Treasury yields increased the liability and caused a decrease in funded ratios for pension plans.
Chart 3: Treasury Curve2
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Credit Spreads
Credit spreads had a net neutral impact on funded status on liability driven plans and negative impact on return seeking plans.
Narrowing credit spreads decreased the discount rates and increased liabilities. Intermediate duration credit spreads slightly narrowed 4 bps while long duration credit spreads narrowed 7 bps. The overall decrease in spreads was driven by economic data that surprised to the downside. On a net basis, considering decreasing Treasury yields, the total corporate bond discount rate for pensions decreased approximately 65 bps and increased plan liabilities..
Chart 4: Credit Spreads2
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Equities
Equity market performance had a positive impact on funded status.
Overall positive performance in global equity markets despite negative performance in energy stocks, helped funded statuses. U.S. large cap stocks lagged U.S. small cap stocks with returns of approximately 5.89% and 9.27%, respectively, while International equities returned around 8.06%.
Chart 5: Equity Index Total Returns2
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1Assumptions
- Data as of 9/30/2024, Source: PNC.
- The funded ratio changes are for generic plans with allocation and liability profiles specified below. Results are market driven and do not incorporate any plan-specific effects, such as benefit payments, expenses, benefit accruals, or plan contributions. Funded ratio changes are sensitive to the beginning of the period funded ratio.
- A return-driven plan is a pension plan with an asset allocation commonly associated with an absolute return-objective and has a high allocation to return-seeking assets (public equity in this case) and typically has high funded status volatility. Assumed asset allocation is 70% MSCI All Country World, 30% Bloomberg Aggregate.
- A liability driven plan is one that is well along its path in a liability-centric approach to investing and has a large allocation to long-duration bonds to help reduce funded status volatility. Assumed asset allocation is 20% MSCI All Country World, 64% Bloomberg Long Credit, 16% Bloomberg Long Government.
- Liability profile is based on BAML Mature/Average U.S. Pension Plan AAA-A Corp Indexes with average duration of 13.5 years.
2Data as of 9/30/2024, Source: FactSet®. FactSet® is a registered trademark of FactSet Research Systems Inc. and its affiliates.
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Accessible Version of Charts
Chart 1: Funded Ratio Change: Return-Driven Plan
| Return-Driven Plan | Funded Ratio Change |
| Beginning of Quarter | 100.00% |
| Change due to Treasury Rates | -2.00% |
| Change Due to Credit Spreads | 0.00% |
| Change Due to Equities | 1.20% |
| End of Quarter | 99.20% |
Chart 2: Funded Ratio Change: Liability-Driven Plan
| Liability-Driven Plan | Funded Ratio Change |
| Beginning of Quarter | 100% |
| Change due to Treasury Rates | -5.90% |
| Change Due to Credit Spreads | -0.50% |
| Change Due to Equities | 4.30% |
| End of Quarter | 97.90% |
Maturity |
6/30/24 |
9/30/24 |
Change (right axis) |
1 |
5.12% |
3.98% |
-114 |
3 |
4.54% |
3.58% |
-96 |
5 |
4.36% |
3.58% |
-78 |
7 |
4.31% |
3.66% |
-65 |
9 |
4.33% |
3.75% |
-58 |
11 |
4.38% |
3.84% |
-53 |
13 |
4.45% |
3.94% |
-51 |
15 |
4.54% |
4.06% |
-48 |
17 |
4.63% |
4.17% |
-46 |
19 |
4.71% |
4.28% |
-43 |
21 |
4.76% |
4.36% |
-40 |
23 |
4.77% |
4.40% |
-37 |
25 |
4.73% |
4.38% |
-35 |
27 |
4.63% |
4.30% |
-33 |
29 |
4.47% |
4.15% |
-32 |
Date |
Intermediate Credit Option-Adjusted (OAS) |
Long Credit Option-Adjusted Spread (OAS) |
6/30/24 |
0.76 |
1.15 |
7/31/24 |
0.75 |
1.15 |
8/31/24 |
0.74 |
1.14 |
9/30/24 |
0.72 |
1.08 |
Chart 5: Equity Index Total Returns (Cumulative)
| Index | Date | Percent |
| Russell 3000 | 6/30/2024 | 0.00% |
| 7/31/2024 | 0.37% | |
| 8/31/2024 | 4.01% | |
| 9/30/2024 | 6.12% | |
| MSCI ACWI ex USA | 6/30/2024 | 0.00% |
| 7/31/2024 | 2.31% | |
| 8/31/2024 | 5.23% | |
| 9/30/2024 | 8.06% |
