U.S. corporate pension plans benefited from declining credit spreads since the start of 2016 as the average plan funded status rose to more than 90% by April 2018 from around 80%. Over that period, the yield spread between BBB-rated corporate debt and the 10-year Treasury yield fell to 142 basis points from 223 basis points, while the spread between A-rated issues was less volatile, but still fell about 50 basis points.
As more corporate plan sponsors look to match the duration of liabilities with their bond portfolio, corporate spreads, and their volatility, have become an increasingly crucial factor. While a rising-rate environment will lower the value of a plan’s liabilities, it can also negatively impact the plan’s assets. Corporate pension liabilities are typically valued using A-rated yields, but many plans supplement their duration matching with lower-rated, but more volatile, investment-grade securities. That volatility creates a potential mismatch problem for plan assets, which can negatively impact funding ratios.
