Corporate defined benefit plan funded levels increased during the fourth quarter of 2024. The primary drivers were higher discount rates that decreased the liability which was partially offset by negative returns in most return-seeking asset classes. A typical return-driven plan had a 5.7% increase in its funded ratio, while a typical liability-driven plan observed a 1.4% increase. Return-driven plans with higher equity allocations saw a larger increase in funded status due to the smaller impact of rising discount rates on the assets. This year, the sample return-driven plan funded ratio has improved approximately 15.2%, while a liability-driven plan has improved approximately 4.0%.
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 increased at all points along the curve and had a positive impact on funded status.
During the quarter, the Treasury curve increased, with overall steepening across the curve. The short end of the curve increased approximately 25-80 basis points (bps), while the long end of the curve increased approximately 65-80 bps. Driving the increased yields was the market’s focus on anticipated positive economic growth and inflation concerns, despite Federal Reserve’s 25 bps rate cuts in November and December as they were already priced into the market. In isolation, the increase in Treasury yields decreased the liability and caused an increase in funded ratios for pension plans.
Chart 3: Treasury Curve2
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Credit Spreads
Credit spreads had a negative impact on funded status.
Narrowing credit spreads decreased the discount rates and increased liabilities. Intermediate duration credit spreads slightly narrowed 7 bps, while long duration credit spreads narrowed 8 bps. Overall, credit spreads continued to compress as the business cycle extended and financial conditions eased. On a net basis, considering increasing Treasury yields, the total corporate bond discount rate for pensions increased approximately 70 bps and decreased plan liabilities..
Chart 4: Credit Spreads2
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Equities
Equity market performance had a negative impact on funded status.
Overall negative performance in global equity markets hurt funded statuses. Despite positive performance in the U.S. market, negative performance in international markets due to energy and materials stocks cause overall equity returns to be negative. U.S. large cap stocks outperformed U.S. small cap stocks with returns of approximately 2.4% and 0%, respectively, while International equities returned around -7.6%.
Chart 5: Equity Index Total Returns2
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1Assumptions
- Data as of 12/31/2024, 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 12.9 years.
2Data as of 12/31/2024, 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 | 100.0% |
| Change due to Treasury Rates | 7.4% |
| Change Due to Credit Spreads | -1.0% |
| Change Due to Equities | -0.7% |
| End of Quarter | 105.7% |
Chart 2: Funded Ratio Change: Liability-Driven Plan
| Liability-Driven Plan | Funded Ratio Change |
| Beginning of Quarter | 100% |
| Change due to Treasury Rates | 1.8% |
| Change Due to Credit Spreads | -0.2% |
| Change Due to Equities | -0.2% |
| End of Quarter | 101.4% |
Maturity |
9/31/24 |
12/31/24 |
Change (right axis) |
1 |
3.98% |
4.23% |
25 |
3 |
3.58% |
4.31% |
73 |
5 |
3.58% |
4.40% |
82 |
7 |
3.66% |
4.48% |
82 |
9 |
3.75% |
4.55% |
80 |
11 |
3.84% |
4.62% |
78 |
13 |
3.94% |
4.69% |
75 |
15 |
4.06% |
4.75% |
69 |
17 |
4.17% |
4.81% |
64 |
19 |
4.28% |
4.86% |
58 |
21 |
4.36% |
4.90% |
54 |
23 |
4.40% |
4.91% |
51 |
25 |
4.38% |
4.90% |
52 |
27 |
4.30% |
4.87% |
57 |
29 |
4.15% |
4.81% |
66 |
Date |
Intermediate Credit Option-Adjusted (OAS) |
Long Credit Option-Adjusted Spread (OAS) |
9/30/24 |
0.72 |
1.08 |
10/31/24 |
0.67 |
1.05 |
11/30/24 |
0.62 |
1.00 |
12/31/24 |
0.66 |
1.00 |
Chart 5: Equity Index Total Returns
| Index | Date | Percent |
| Russell 3000 | 9/30/2024 | 0.00% |
| 10/31/2024 | -0.76% | |
| 11/30/2024 | 5.81% | |
| 12/31/2024 | 2.54% | |
| MSCI ACWI ex USA | 9/30/2024 | 0.00% |
| 10/31/2024 | -4.91% | |
| 11/30/2024 | -5.77% | |
| 12/31/2024 | -7.60% |
