April 2021: U.S. Monthly Pension Monitor

Funded status holds steady as investment gains were muted by lower discount rates

April Market Summary

  • Average funded status was unchanged in April: Assets returned 2.3% while a decrease in discount rates increased liabilities by 2.2%.
  • U.S. equity markets posted another strong month: The S&P 500 increased by 5.2% in April and is now up 11.3% since the start of the calendar year¹.
Market Watch Dec 2019 Dec 2020 Mar 2021 Apr 2021
Funded status 90% 90% 98% 98%
CITI discount rate2 3.01% 2.23% 2.94% 2.81%
Long Credit yield2 3.63% 2.78% 3.45% 3.35%
U.S. 30Y TSY yield 2.39% 1.64% 2.41% 2.30%
S&P 500 3,231 3,756 3,973 4,181
  • The yield on the Bloomberg Barclays Long Credit Index dropped 10 basis points (bps): Long credit spreads widened 1 bps while long end treasury yields fell by 11 bps.
  • Investment grade (IG) corporate supply slows down: After a strong March of over $200B, new supply totaled $98B in April. Year-to-date new issuance is now $548B, a 32% decline relative to this time last year, but 30% higher compared to April 2019.
     

Long credit spreads vs. long Treasury yields

Chart 1

Spotlight: Three reasons investment grade private credit is more liquid than you might think

  • Many plan sponsors are adding alternative sources of credit like investment grade private credit (IGPC) to their hedging portfolios in search of yield and diversification. One of the most common questions we receive is “how liquid is investment grade private credit?”
  • Contrary to common belief, there is an active secondary market in private fixed income, where the bid ask is often only a couple bps for more liquid names.
    • In a typical year, there is roughly $100BN of new issuance, while about $3BN - $4BN change hands on the secondary market. The lower volume of secondary market activity is a result of a lack of sellers, not buyers, where insurers with a buy-and-hold mentality create a market with relatively few willing sellers.
  • The most direct liquidity source is via other lenders that are holders of the original deal, who already own and are familiar with the credit and happy to take an additional allocation.
    • Regular issuers, such as Major League Baseball, are especially liquid. The market has already done the due diligence and transactions often complete at a competitive rate on the same day offers are made. Sellers can also reach a broader market through brokers, who also act as third-party pricing agents.
  • A fund structure significantly improves liquidity by crossing flows, utilizing a liquidity sleeve and providing greater diversification.
    • Capacity constraints in the IGPC market means many funds establish a queue for investors. The most natural source of liquidity is to cross the in/outflows, simply transferring ownership from those looking to exit with those looking to add exposure. IGPC funds often also hold a small sleeve of public fixed income to help manage duration. If needed, this can provide an additional source of liquidity buffer before selling private credit holdings.

Milliman Pension Funding Index

Chart 2

¹Data from reference Bloomberg Barclays Indices. Issuance data sourced from SIFMA.

²The CITI discount rate corresponds to the FTSE short pension liability index. The Long Credit yield corresponds to the Bloomberg Barclays Long Credit Index.

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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AAM is an independent U.S. retail distribution firm that provides a range of solutions and products to financial advisors at wirehouses, registered investment advisors and independent broker-dealers.

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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.