January 2022: U.S. Monthly Pension Monitor

Despite a turbulent equity market, average funded status remained unchanged due to higher discount rates

January Market Summary

  • Despite a market selloff, funded status stayed flat in January: Higher discount rates offset falling equity markets resulting in muted funded status movement. Assets returned -4.8%, while liabilities fell by 4.7%.1
  • U.S. equity markets posted their worst month since March 2020: After soaring almost 27% in 2021, the S&P 500 experienced a sharp selloff in January due to inflation concerns and fed tightening, ending the month down 5.3%.  
  • The yield on the Bloomberg Barclays Long Credit Index increased 41 basis points (bps): Long credit spreads widened 16 bps while the underlying Treasury basis increased 25 bps.
Market Watch Dec 2019 Dec 2020 Dec 2021 Jan 2022
Funded status 89.8% 90.3% 99.6% 99.5%
CITI discount rate2 3.01% 2.23% 2.63% 2.99%
Long Credit yield2 3.63% 2.78% 3.10% 3.51%
U.S. 30Y TSY yield 2.39% 1.64% 1.90% 2.11%
S&P 500 3,231 3,756 4,766 4,516

Spotlight: A rough start

  • Concerns about the Fed turning more hawkish going into a slowing economy has cast a dark cloud over the markets
    • The 2s-30s curve flattened significantly, with the spread compressing from 117 bps to 93 bps
    • Rising short term interest rates have a high impact on Treasury funding costs. $14BN of the $18BN gross issuance in 2021 were of maturities less than one year 
  • Stock markets turned decidedly negative, with the S&P 500 having its worst January ever at -5.3%, only surpassed by losses in January of 2009 during the depth of the financial crisis
    • Despite strong reported earnings from Microsoft & Apple, overall market sentiment was extremely negative, with 349 of 500 stocks falling during the month
    • The NASDAQ had also seen its worst January in history, with many of the former leaders falling hard from peak valuation
    • Former market darlings such as Peloton, Palantir, Nvidia, and Tesla have all fallen by 84%, 65%, 27%, and 24% respectively from peak, with Netflix dropping 22% in a single day post earnings
    • Assets furthest out the risk curve, such as Bitcoin is now down 43% from its peak in November
  • Despite the sell-off in equities, the mood has remained relatively sanguine in Investment Grade (IG) credit markets for now, with spreads only widening by 14 bps over the month
    • The equity downdraft would imply IG credit should be approximately 10 bps wider than current spread levels
    • Down the credit stack, high yield corporates experienced a more punitive risk off environment, with spreads widening 59 bps in January
    • Although risk assets had a choppy month, funded status for most corporate DB plans remained stable due to higher rates and wider spreads which raised discount rates and lowered liability present values
  • IG corporate issuance activity remains robust with $95BN of new issues pricing this month compared to $90BN in January 2021
  • SLC Management has been positioned to take advantage of this fallout by holding a ~5% sleeve of Treasuries in our Long Credit portfolios that can be deployed as dry powder in the event of further spread widening

Milliman Pension Funding Index (January Estimate) 

1 Funded Status for the current month is estimated and subject to change as final numbers are released. Data from reference Bloomberg Indices.

2 The Long Credit yield corresponds to the Bloomberg Long Credit Index. The Citi Discount Rate corresponds to the FTSE short pension liability index.

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About SLC Management

SLC Management is the brand name for the institutional asset management business of Sun Life Financial Inc. (“Sun Life”) under which Sun Life Capital Management (U.S.) LLC in the United States, and Sun Life Capital Management (Canada) Inc. in Canada operate.

Sun Life Capital Management (Canada) Inc. is a Canadian registered portfolio manager, investment fund manager, exempt market dealer and in Ontario, a commodity trading manager. Sun Life Capital Management (U.S.) LLC is registered with the U.S. Securities and Exchange Commission as an investment adviser and is also a Commodity Trading Advisor and Commodity Pool Operator registered with the Commodity Futures Trading Commission under the Commodity Exchange Act and Members of the National Futures Association.

BentallGreenOak, InfraRed Capital Partners (InfraRed), Crescent Capital Group (Crescent), and Advisors Asset Management are also part of SLC Management.

BentallGreenOak is a global real estate investment management advisor and a provider of real estate services. In the U.S., real estate mandates are offered by BentallGreenOak (U.S.) Limited Partnership, who is registered with the SEC as an investment adviser, or Sun Life Institutional Distributors (U.S.) LLC, an SEC registered broker-dealer and a member of the Financial Industry Regulatory Authority (“FINRA”) . In Canada, real estate mandates are offered by BentallGreenOak (Canada) Limited Partnership, BGO Capital (Canada) Inc. or Sun Life Capital Management (Canada) Inc. BGO Capital (Canada) Inc. is a Canadian registered portfolio manager and exempt market dealer and is registered as an investment fund manager in British Columbia, Ontario and Quebec.

InfraRed Capital Partners is an international investment manager focused on infrastructure. Operating worldwide, InfraRed manages equity capital in multiple private and listed funds, primarily for institutional investors across the globe. InfraRed Capital Partners Ltd. is authorized and regulated in the UK by the Financial Conduct Authority.

Crescent Capital Group is a global alternative credit investment asset manager registered with the U.S. Securities and Exchange Commission as an investment adviser. Crescent provides private credit financing (including senior, unitranche and junior debt) to middle-market companies in the U.S. and Europe, and invests in high-yield bonds and broadly syndicated loans.

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UK Tax Strategy - InfraRed (UK) Holdco 2020 Limited

InfraRed (UK) Holdco 2020 Ltd is the UK holding company of InfraRed Partners LLP and a subsidiary of Sun Life (U.S.) Holdco 2020 Inc, which has its headquarters in the U.S. The company was incorporated to purchase InfraRed Partners LLP and acts solely as a passive holding company. The Tax Strategy for the InfraRed Holdco Group sets out our approach to the management of InfraRed Holdco Group UK tax affairs in supporting business activities in the UK. 

This UK tax strategy is published in accordance with the requirements set out in Schedule 19 of Finance Act 2016. The strategy, which has been approved by the Board of Directors of InfraRed (UK) Holdco 2020 Ltd, is effective for the period ending 31 December 2024. It applies to InfraRed (UK) Holdco 2020 Ltd and its dormant subsidiary Sun Life (UK) Designated Member Ltd, referred to as the “InfraRed Holdco Group”. InfraRed Holdco Group.