Corporate defined benefit plans had sizeable declines in funding levels during first-quarter 2020 as the COVID-19 crisis continues to take a toll on markets. A typical return-driven plan had a 13.6% decrease in its funded ratio, while a typical liability-driven plan had a 6.0% decrease. Liability-driven plans with higher allocations to longer-duration assets tend to see smaller funded ratio movements when market volatility increases.

According to our analysis, equity market contraction accounted for the majority of the impact, while interest rate and credit spreads had minimal combined effect.

Funded Ratio Change: Return-Driven Plan (Chart 1)

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Source: PNC

Funded Ratio Change: Liability-Driven Plan (Chart 2)

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Source: PNC


  • The funded ratio changes displayed above are for generic plans with the allocation and liability profiles specified below. Results are market driven and do not incorporate any plan-specific effects, such as benefit payments, expenses, benefit accruals, or plan contributions. Funded ratio changes are sensitive to the beginning of the period funded ratio.
  • A return-driven plan is a pension plan with an asset allocation commonly associated with an absolute return objective and has a high allocation to return-seeking assets (public equity in this case) and typically has high funded status volatility. Assumed asset allocation is 70% MSCI All Country World, 30% Bloomberg Barclays US Aggregate Bond Index.
  • A liability-driven plan is one that is well along its path in a liability-centric approach to investing and has a large allocation to long-duration bonds to help reduce funded status volatility. Assumed asset allocation is 30% MSCI All Country World, 56% Barclays Capital U.S. Long Credit Index, and 14% Barclays Capital Long Government Index.
  • Liability profile is based on BAML Mature/Average US Pension Plan AAA-A Corp Indexes with average duration of 15 years.

Treasury Rates

Treasury rates decreased and reduced funded ratios as liabilities increased

Treasury rates decreased along the entire yield curve during the quarter, with the largest declines seen in the short end of the curve. During March, the Federal Reserve (Fed) made two emergency rate cuts, bringing the federal funds rate to a range of 0.0-0.25%. While this has contributed to the larger declines seen in the short end, the risk-off environment and increased demand for US Treasury bonds caused rates along the curve to decline at least 100 basis points (bps). Rate volatility also increased dramatically, and the Treasury market experienced liquidity issues during the quarter.

Treasury Curve (Chart 3)

visual display of treasury curve


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Source: BAML US Treasury Curve

Credit Spreads

Credit spreads widened and raised funded ratios as liabilities decreased

Credit spreads had a positive impact on funded ratios during the quarter. Intermediate spreads widened 178 bps while long spreads widened 140 bps. Global uncertainty has resulted in a flight to quality, which led to widening credit spreads. Downgrade activity has begun in the energy and airline sectors. As liquidity was severely stressed in the corporate bond space, the Fed for the first time ever has taken action in this sector to inject liquidity. While conditions have improved, we are still far away from normalcy in credit markets. On a net basis, the total corporate bond discount rate (which is derived from higher-quality corporate bonds) increased 8 bps. 

Credit Spreads (Chart 4)

visual display of credit spreads


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Source: FactSet® Research Systems Inc.


Equity market performance had a large negative impact on funded status

COVID-19 has led to global uncertainty, which has resulted in extreme volatility for both US and international stocks. Investors have sold off riskier equity investments in favor of safer Treasury assets and cash. The S&P 500® decreased approximately 20% this quarter after observing a 34% pullback earlier in March. All sectors saw major declines, with large cap outperforming small cap and growth outperforming value. 

Equity Index Total Returns (Chart 5)

visual display of equity index total returns

View accessible version of chart 5

Source: FactSet Research Systems Inc.

For more information, contact Kimberlene Matthews, Director of Pension Solutions, at



Chart 1: Funded Ratio Change: Return-Driven Plan (view image of chart 1

Return-Driven Plan Funded Ratio Change
Beginning of Quarter 100%
Change due to Treasury Rates -11.8%
Change Due to Credit Spreads 13.1%
Change Due to Equities -14.9%
End of Quarter 86.4%

Chart 2: Funded Ratio Change: Liability-Driven Plan (view image of chart 2)

Liability-Driven Plan Funded Ratio Change
Beginning of Quarter 100%
Change due to Treasury Rates -2.9%
Change Due to Credit Spreads 3.3%
Change Due to Equities -6.4%
End of Quarter 94.0%

Chart 3: Treasury Curve (view image of chart 3)

Maturity 12/31/19 3/31/20 Change (Basis Points)
1 1.65% 0.14% -151
3 1.60% 0.25% -135
5 1.72% 0.44% -128
7 1.82% 0.57% -126
9 1.89% 0.64% -125
11 1.95% 0.71% -124
13 2.02% 0.80% -123
15 2.11% 0.91% -120
17 2.21% 1.03% -117
19 2.30% 1.16% -114
21 2.39% 1.28% -111
23 2.45% 1.37% -108
25 2.48% 1.43% -105
27 2.48% 1.46% -102
29 2.45% 1.45% -99

Chart 4: Credit Spreads (view image of chart 4)

Date Intermediate Credit Option-Adjusted (OAS) Long Credit Option-Adjusted Spread (OAS)
12/31/19 0.64 1.39
1/31/20 0.69 1.51
2/29/20 0.86 1.73
3/31/20 2.42 2.79

Chart 5: Equity Index Total Returns (view image of chart 5)

Index Date Percent
Russell 3000 12/31/19 0.00%
  1/31/20 -0.11%
  2/29/20 -8.29%
  3/31/20 -20.90%
MSCI ACWI ex USA 12/31/19 0.00%
  1/31/20 -2.68%
  2/29/20 -10.36%
  3/31/20 -23.27%