- Corporate defined benefit plan liabilities for GAAP accounting purposes are generally determined based on discount rates derived from spot yields from Aa corporate bonds.
- While Treasury yields plummeted in the first quarter of 2020, wider corporate bond spreads likely led to a decline in pension liabilities which may have helped to preserve and in some cases even improve funded status for some plans, despite significant equity market declines.
- Any decline in liability values was likely temporary as credit spreads have tightened materially in the month of April while Treasury yields have remained low.
- Any downgrades in the Aa corporate bond universe might lead to further increases in liability values with the remaining universe of Aa bonds yielding less once the downgraded bonds are removed from the universe.
Recent liability gains can be temporary and could evaporate if Aa bond downgrades occur. We believe it is important for plan sponsors to understand the drivers of funded status change especially during stressed credit environments and know what, if anything, can be done to protect funded status.