November 2020: U.S. Monthly Pension Monitor

Funded status increases 1% on robust investment gains

November market summary

  • Average funded status was up by 1% over the month: Assets returned 5%, while liabilities increased by 3.7%.
  • S&P 500: The S&P 500 soared 10.8% in the month of November and is now up 12.1% year-to-date.
Market Watch Dec 2018 Dec 2019 Oct 2020 Nov 2020
Funded status 87% 90% 85% 86%
CITI discount rate1 4.05% 3.01% 2.44% 2.21%
Long Credit yield1 4.89% 3.63% 3.12% 2.80%
U.S. 30Y TSY yield 3.01% 2.39% 1.66% 1.57%
S&P 500 2,507 3,231 3,270 3,622
  • The yield on the Bloomberg Barclays Long Credit Index fell by 32 basis points (bps): Driven by a 27 bps collapse in credit spreads (OAS) and 6 bps decline in long end rates.
  • Credit Spreads narrowed within broad Investment Grade (IG) credit: IG credit spreads finishing the month at 100 bps, a 19 bps tightening month over month².
  • IG Corporate Issuance: U.S. IG corporate issuance posted another modest month at $92B, but year-to-date issuance now exceeds $1.8T.

Long credit spreads vs. long Treasury yields

Long credit spreads vs. long Treasury yields Chart

Spotlight: Derivative hedging instruments in an LDI framework

  • In the current environment, we have seen an increasing number of plan sponsors looking to use derivatives within their LDI programs. Derivatives allows plans to separately hedge against interest rate risk, independent of the allocation decision between growth assets and hedging assets.
    • Plan sponsors can maintain their allocations to the “rewarded” risks of growth assets while simultaneously deleveraging their plans from the “unrewarded” risks of being under-hedged to interest rate risk.
  • Many plan sponsors are familiar with the use of interest rate derivatives to extend duration. However, equity derivatives can also be used to help improve the hedge ratio.
    • Plan sponsors looking to reduce their interest rate exposure can transfer physical assets into the liability hedging portfolio and achieve the growth asset exposure through derivative products that synthetically replicate equity returns.
  • This approach achieves a similar liability hedging outcome but results in a potentially more efficient solution with the plan sponsor owning a physical hedging portfolio and a synthetic growth portfolio.
    • It allows for a higher allocation to corporate bonds, which provide additional yield and spread exposure. This is especially important when the credit spread component makes up over 50% of the long credit yield.
    • Greater opportunity for upside from active management in less efficient fixed income markets that sponsors may miss out on by capturing fixed income exposure synthetically.
    • From a collateral perspective this approach can be more efficient as movements in equity derivatives are likely to offset the moves in the underlying collateral (typically a bond portfolio) required to meet payments on the derivatives.

Milliman Pension Funding Index

Milliman Pension Funding Index Chart

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.

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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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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.