May 2021: U.S. Monthly Pension Monitor

Funded status inches higher on positive investment gains

May Market Summary

  • Average funded status increased by 0.4% to 99% in May: Assets returned 1.2% while a decrease in discount rates increased liabilities by 0.8%.
  • U.S. equity markets posted its fourth consecutive positive month: The S&P 500 ticked 0.5% higher in May and is now up 11.9% since the start of the calendar year.
Market Watch Dec 2019 Dec 2020 Apr 2021 May 2021
Funded status 90% 90% 98% 99%
CITI discount rate1 3.01% 2.23% 2.81% 2.79%
Long Credit yield1 3.63% 2.78% 3.35% 3.30%
U.S. 30Y TSY yield 2.39% 1.64% 2.30% 2.28%
S&P 500 3,231 3,756 4,181 4,204
  • The yield on the Bloomberg Barclays Long Credit Index dropped 5 basis points (bps): Long credit spreads tightened 5 bps while long treasury yields remained mostly unchanged month over month.¹
  • New Investment grade (IG) corporate supply totaled $123B: Highlighted by Amazon’s $18.5B deal of which $7B was on the long end. Year-to-date issuance is now $698B, which is down 34% relative to 2020 but up 35% compared to 2019.

Spotlight: Consideration for sponsors as plans reach full funding

  • For most pension plans, funded status has continued to improve over the last few months with the average plan now close to fully funded – a level not seen since before the financial crisis. In addition to strong equity returns, plan sponsors have received a boost from rising Treasury yields.
    • We believe plan sponsors should have a plan in place to move quickly and capitalize on these gains, which can be fleeting. Yields are already lower than their recent highs –reached in early April – and equity gains can quickly disappear in a volatile market.
  • Plan sponsors may want to consider utilizing a completion manager with derivative capabilities to help implement asset allocation changes efficiently.
    • Completion managers can easily adjust duration, credit and equity beta exposures to lock in funded status improvements. Plan sponsors can then reposition the underlying physical assets over a more reasonable time period.
  • As plan sponsors de-risk further, moving from growth-oriented assets like equities to liability-hedging portfolios, they may want to reassess the composition of their fixed income strategies.
    • As more of the overall duration risk inherent in plan liabilities is hedged, credit spread volatility can become an increasingly important driver of overall funded status volatility.
    • Many assets exhibit a credit spread sensitivity to a greater or lesser extent. We utilize a measure called the “beta-adjusted credit spread hedge ratio” to help us understand the relative sensitivities of the total liability hedging portfolio to the liability.
    • For example, on a relative basis AA- rated corporate bond spreads (the basis for most liability discount curves) only have a beta of about 0.8 while BBB-rated spreads have a beta closer to 1.5. Therefore, as plan sponsors allocate more to broad market fixed income strategies, they need to be careful not to over hedge the less sensitive liabilities.
    • At SLC Management we help sponsors understand the drivers of funded status volatility across factors such as duration, spread and curve and build liability hedging portfolios to meet the changing needs of plan sponsors as they progress along their glidepaths.

Milliman Pension Funding Index

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

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

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 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.