December 2021: U.S. Monthly Pension Monitor

Funded status increased 2.6% in December due to a rise in discount rates and rally in equities

December Market Summary

  • Average funded status increased by 2.6% to 100.1%: Assets returned 2.1% while a rise in discount rates decreased liabilities by 0.6%.¹
  • U.S. equity markets rebounded in December: After falling 0.8% in November, the S&P 500 Index rose 4.4% in December and ended the calendar year higher by 26.9%.  
  • The yield on the Bloomberg Barclays Long Credit Index increased 5 basis points (bps): Long credit spreads tightened 5 bps while the underlying Treasury basis increased 10 bps.
Market Watch Dec 2019 Dec 2020 Nov 2021 Dec 2021
Funded status 90% 90% 97% 100%
CITI discount rate2 3.01% 2.23% 2.56% 2.62%
Long Credit yield2 3.63% 2.78% 3.05% 3.10%
U.S. 30Y TSY yield 2.39% 1.64% 1.79% 1.90%
S&P 500 3,231 3,756 4,567 4,766

Spotlight: What a year

  • 2021 was another eventful year for pension plan sponsors. While buoyant equity markets continued to drive returns, with the S&P 500 up 26.9%, a moderate uptick in discount rates also contributed to a strong year of funded status improvements. The average pension plan funded status improved from 90% at the end of 2020 to 100% at the end of 2021. ¹
    • As a result, pension buyout volumes were elevated this year, with an estimated $35B of transactions pricing over the course of 2021.²
  • Many plan sponsors took the opportunity to de-risk their plans and lock in these funded status gains. Flows into liability hedging portfolios led to an increased interest in credit alternatives such as investment grade private credit, as sponsors looked to diversify their portfolios.
  • Loose monetary policy which originated as a Covid response continued into 2021, where M2 expanded by 13% and the Fed continued to purchase $120BN per month of Treasuries and Agency MBS before finally announcing a taper plan in late November.
  • Debt/GDP now stands at 130%, the highest figure since World War 2, while daily reverse REPO is now $1.7TN, a sign of excess liquidity in the market.
  • In credit markets, we saw another year of robust issuance, with roughly $1.4T of Investment Grade bond issuance and $500MM of High Yield issuance.
  • Private markets remained attractive as SLC Management’s investment grade private credit earned 86 bps of excess spread in long deals and 152 bps in intermediate versus similar rated public credit, highlighting the benefits of a well-diversified hedging portfolio. ³
  • Simultaneously, supply chain disruptions have caused inflation to spike to its highest level since 1982, rising to 6.8% YoY. The economy saw a cascading wave of price spikes rotating through different sectors, from lumber to used cars, beef, and coffee.
  • Inflation fears and uncertainty about the Fed’s reaction has caused rates market to whipsaw, with the 10-year rate swinging 36 bps intra-quarter in Q4.
    • While some believe it is important for the Fed to step-up against rising inflation, others feel the Fed would be overly aggressive given our fiscal position and result in a policy error.
  • During this uncertain macroeconomic climate, it is especially important to have an active manager that can help navigate unchartered waters without relying on getting macro calls correct.

Milliman Pension Funding Index (December Estimate)

¹ Funded Status for the 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. Source: Mercer.

³ The relative value over public benchmarks estimate is derived by comparing each loan’s spread at funding with a corresponding public corporate bond benchmark based on credit rating. Loans that are internally rated as “AA” are compared to the Bloomberg Barclays U.S. Corporate Aa Index, loans rated “A” are compared to the Bloomberg Barclays U.S. Corporate A Index, while loans rated “BBB” are compared to the Bloomberg Barclays U.S. Corporate Baa Index. For certain power and utility project loans, a best fit approach of a variety of Bloomberg Barclays’ indices was employed prior to September 30, 2016. After this date, these types of loans were compared to Bloomberg Barclays Utilities A Index and Bloomberg Barclays Utilities Baa Index, for “A” and “BBB” internally rated loans, respectively. Relative spread values obtained through the above methodologies were then aggregated and asset-weighted (by year) to obtain the overall spread value indicated in the article. Investment-grade credit ratings of our private placements portfolio are based on a proprietary, internal credit rating methodology that was developed using both externally-purchased and internally developed models. This methodology is reviewed regularly. More details can be shared upon request. There is no guarantee that the same rating(s) would be assigned to portfolio asset(s) if they were independently rated by a major credit ratings organization.

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.