January 2021: U.S. Monthly Pension Monitor

Rise in discount rates increased funded status by nearly 2%

January Market Summary

  • Average funded status was up by 1.7% over the month: Assets returned
  • 0.2% while an increase in discount rates decreased liabilities by 2.1%. 2020 up 16.3%.
  • S&P 500: The S&P 500 had its first negative month since October, declining 1.1% in January.
Market Watch Dec 2018 Dec 2019 Dec 2020 Jan 2021
Funded status 87% 90% 8% 90%
CITI discount rate1 4.05% 3.01% 2.23% 2.43%
Long Credit yield1 4.89% 3.63% 2.78% 2.98%
U.S. 30Y TSY yield 3.01% 2.39% 1.64% 1.83%
S&P 500 2,507 3,231 3,756 3,714
  • The yield on the Bloomberg Barclays Long Credit Index increased 20 basis points (bps): Credit spreads remained roughly unchanged month over month while long end rates increased 21 bps².
  • Steepening yield curve environment: The 2 year Treasury yield dropped 1 bps while the 10 and 30 year yield increased 15 and 18 bps, respectively.
  • Investment Grade (IG) Corporate Issuance After a record setting year in 2020, IG issuance posted $110B in January, an increase from the typically quiet month of December, but a 23% decrease compared to January 2020.

Long credit spreads vs. long Treasury yields

Spotlight: Tight spreads in credit markets 

  • The flood of liquidity from the Fed has continued to push up risk asset prices. M2, the measure of money supply, has ballooned by 27% from $15.4TN to $19.6TN over the last 12 months.
    • At the end of January, long credit OAS stood at 137bps, which is inside the level of 150bps from a year ago, prior to the Covid-19 market sell off.
    • Similarly , in equity markets, the P-E ratio of the S&P 500 index has increased from 24 a year ago to 38 today.
    • The Treasury curve has also steepened significantly based on inflation concerns, and the 2s-10s spread now stands at 0.96%, its steepest level in about 3.5 years.
  • While there is some sentiment that spreads are due for a move wider, there is no obvious catalyst. Therefore, despite concerns, many investors might not be willing to dial down credit exposure for fear of missing out on returns as spreads continue to grind tighter. However, one option is to consider moving up in quality, to maintain credit exposure while buffering against a sell-off.
    • In long credit portfolios it is important to balance the diversification benefits of holding BBB-rated corporates against the larger potential price impact they face during a market sell-off. When spreads are tight like they are now, the risk reward of being down in quality becomes more asymmetric in a negative manner.
    • As a result, at SLC Management we have looked to reduce our exposure to BBBs in our long credit portfolios. This also means moving away from industrials and adding to utilities and financials.
  • In contrast to public markets, private market spreads have not fully retrenched to their previous tights post the Covid sell-off. A strategic allocation to private credit not only could provide additional yield, but also a diversified source of credit exposure that could buffer against a market sell-off.

Milliman Pension Funding Index

¹ The CITI discount rate corresponds to the FTSE short pension liability index. The Long Credit yield corresponds to the Bloomberg Barclays Long Credit Index.

² Data from reference Bloomberg Barclays Indices. Issuance data sourced from SIFMA.

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.

Securities will only be offered and sold in compliance with applicable securities laws.

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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The content of this website is intended for institutional investors only. It is not for retail use or distribution to individual investors. All investments involve risk including the possible loss of capital. All asset classes have associated risks. Certain asset classes are speculative, can include a high degree of risk and are suitable only for long-term investment. Further information available upon request. This website is for informational and educational purposes only. Past performance is not a guarantee of future results.

The information contained in this website is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained on this website. The assets under management (AUM) represent the combined AUM of Sun Life Capital Management (Canada) Inc., Sun Life Capital Management (U.S) LLC, BentallGreenOak, Crescent Capital Group, InfraRed Capital Partners, and Advisors Asset Management.

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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.