T. Rowe Price T. Rowe Price Trusty Logo

Fixed Income

Pension Curve Insider: LDI Solutions June Monthly Recap

Aaron Stonacek, ASA, CFA, Solutions Analyst
Justin Harvey, Solutions Strategist for Multi-Asset Solutions

Monthly Recap

Discount rates ticked down in May as the Treasury curve continued flattening. As a result, both the AA-rated spot curve and the top-yielding curve declined from prior month-end. The short end of the treasury curve rose, while mid to long durations dropped meaningfully, in the range of 10-15 basis points over the month. Investment grade spreads remained stable month over month.

Discount rates now sit 15 basis points higher than a year ago, using the broad AA discount rate curve. Top yielding AA-rated bonds are 10 basis points higher than May 2017, and provide about 20 basis points of additional yield relative to the broader market.

Index turnover during May remained active as over 3.5% of index market value changed eligibility. Entries into the AA index made up the majority of the month’s turnover, totaling nearly $20B while removals accounted for just $3.2B. Statoil’s upgraded bonds had a particularly large effect on the AA-rated curve, totaling nearly $9.5B in market value and spanning maturity between 1 and 25 years, impacting the curve the most at the 9-year point. Removals were not as prevalent during May, however Ontario’s downgrade included a 4-year maturity worth nearly $2B.

Liability Impact

Yield Curve

Liability Value 5/31/18

Discount Rate 5/31/18

Liability Value 4/30/18

Discount Rate 4/30/18

Liability Value 12/31/17

Discount Rate 12/31/17

Yield Curve







Top Yielding
Accounting Curve







IRS Yield Curve







Sources: Barclays POINT, IRS, and T. Rowe Price. Sample plan cash flows have a liability of $10,000 at 4.0% discount rate.

Accounting Curve

Sources: Barclays POINT and T. Rowe Price



Curve Impact



(12 bonds)

Statoil was upgraded during May as 12 bonds entered the AA-rated index. The upgrade amounted to $9.5B in market value, or about 1.5% of the AA-rated index. Spanning 1-25 year maturities, the largest impact on the curve was at the 9-year mark, pushing the curve up 4 basis points.

Kaiser Foundation Hospitals


(4 bonds)

Statoil was upgraded during May as 12 bonds entered the AA-rated index. The upgrade amounted to $9.5B in market value, or about 1.5% of the AA-rated index. Spanning 1-25 year maturities, the largest impact on the curve was at the 9-year mark, pushing the curve up 4 basis points.
Province of Ontario


(1 bond)

The Canadian Province of Ontario was the lone removal from the AA-rated index during May that had a meaningful impact on the curve. The single issue was due to mature in 2022 and had a market value of nearly $2B, accounting for almost all the month’s exiting market value.

Sources: Barclays POINT and T. Rowe Price


New Issues

Other Bonds Entering


Other Bonds Exiting

May 2018






Market Value ($M)





Market Value (%)





2018 YTD






Market Value ($M)





Market Value (%)





Sources: Barclays POINT and T. Rowe Price

Top Yielding Accounting Curve

Sources: Barclays POINT and T. Rowe Price

IRS Curve

Sources: IRS and T. Rowe Price


AAA Corporate OAS

AA Corporate OAS

A Corporate

March Monthly Average




May 1, 2018




May 15, 2018




May 31, 2018




May Monthly Average




Sources: Barclays POINT and T. Rowe Price

One-Year Rolling Returns and Tracking Error


May 2018 Return

YTD Total

Annual Tracking Error Relative to Liability

Average Monthly
Return Difference from Liability

Hypothetical Sample Plan Liability





BBgBarc Aggregate





BBgBarc Long Credit





BBgBarc Long Gov/Credit





Hypothetical T. Rowe Price Custom Benchmark





Sources: Bloomberg Index Services Ltd., T. Rowe Price; Analysis by T. Rowe Price. Performance shown in graph and tables above shown from February 1, 2005 through May 31, 2018.

Past performance cannot guarantee future results. Custom Benchmark returns do not reflect the deduction of management fees. Please refer to the disclosure at the end of the article for important additional information.

Copyright 2018, Bloomberg Index Services Ltd. Used with permission.


IRS Yield Curve: Plan sponsors of qualified defined benefit pension plans use this yield curve to determine funding requirements per IRS regulations. These funding requirements are disclosed on form 5500 annually. Yields on AAA, AA, and A corporate securities determine the yield curve for discounting purposes. The yield curve is not a marked-to-market curve representing any single date, but rather an average yield over the course of the entire month. For more information on the IRS methodology, please see treasury.gov/resource-center and irs.gov/Retirement-Plans.

Accounting Yield Curve: US GAAP requires pension plan sponsors to disclose pension obligations using “fixed-income debt securities that receive one of the two highest ratings given by a recognized ratings agency”. As a proxy for bonds useable for accounting purposes, we use the constituents of BBgBarc AA credit universe to develop the accounting yield curve shown. Please see fasb.org for more information.

Top Yielding Curve: Since the US GAAP rules allow the use of a fairly broad range of securities for accounting purposes, some plan sponsors use an optimized yield curve approach to value their pension liabilities on the disclosure dates. Bonds trading at higher yields than other bonds of similar maturity tend to be used for this purpose. To quantify the effectiveness of this approach, T. Rowe Price developed a yield curve using the highest yielding bonds designed to meet SEC requirements at each node.

Annual Tracking Error Relative to Liability: Calculated as the standard deviation of return differences between a fixed income index and a set of cash flows discounted using the accounting yield curve. The liability return has two components: an interest cost component analogous to roll return on a bond, and yield change component analogous to price return on a bond. The table shows annualized ex-post tracking error.

Average Monthly Return Difference: Similar to the tracking error metric, this metric demonstrates how closely a fixed income benchmark tracks a set of liability returns. We calculate this measure by simply averaging the difference in returns over the period shown.

Sample Plan Liability: Pension plan sponsors must account for the cost of their retirement plan on their financial statements. The amount of this liability can fluctuate over time based on several factors, including benefits earned, benefits paid out, mortality experience, and most significantly, interest rates. The Sample Plan is intended to be a representative defined benefit pension plan and does not reflect the cash flows from any specific plan.

T. Rowe Price Custom Benchmark: An index of fixed income securities created using T. Rowe Price proprietary methodology that attempts to replicate interest rate exposures embedded in a pension plan’s liability structure.

To learn more, please visit troweprice.com

Important Information

This material is directed at institutional investors or advisors/consultants to institutional investors only and is not intended for distribution to retail investors. It has been prepared by T. Rowe Price Associates, Inc. for informational purposes and is not intended to be investment advice or a recommendation to take any particular investment action. This material should not be redistributed, in whole or in part, without prior consent from T. Rowe Price. The views and information contained herein are as of 31 May 2018 and are subject to change without notice.

The illustrations presented are hypothetical and used to demonstrate capabilities. Certain assumptions have been made for modeling purposes and with the benefit of hindsight and are unlikely to be realized. The specific issuers and bond issues mentioned in this document had significant impact on liability curves calculated using BBgBarc index universes. The modeling used for plan and benchmark development has certain inherent limitations. Benchmark construction may not reflect all material economic and market factors that could have impacted implementation or weighting decisions if the modeled plan actually existed during the time period presented. Actual T. Rowe Price Custom Benchmark characteristics, including (among other things) yield, annualized return, liability-relative tracking error and average monthly returns difference relative to plan liability may differ substantially from the hypothetical scenario presented.

T.ROWE PRICE, INVEST WITH CONFIDENCE and the bighorn sheep design are collectively and/or apart, trademarks of T. Rowe Price Group, Inc. © 2018 T. Rowe Price. All rights reserved.



Tap to dismiss


Latest Date Range
Audience for the document: Share Class: Language of the document:
Download Cancel


Share Class: Language of the document:
Download Cancel
Sign in to manage subscriptions for products, insights and email updates.
Continue with sign in?
To complete sign in and be redirected to your registered country, please select continue. Select cancel to remain on the current site.
Continue Cancel
Once registered, you'll be able to start subscribing.

Change Details

If you need to change your email address please contact us.
You are ready to start subscribing.
Get started by going to our products or insights section to follow what you're interested in.

Products Insights

GIPS® Information

T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®). TRP has been independently verified for the twenty one- year period ended June 30, 2017 by KPMG LLP. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.

TRP is a U.S. investment management firm with various investment advisers registered with the U.S. Securities and Exchange Commission, the U.K. Financial Conduct Authority, and other regulatory bodies in various countries and holds itself out as such to potential clients for GIPS purposes. TRP further defines itself under GIPS as a discretionary investment manager providing services primarily to institutional clients with regard to various mandates, which include U.S, international, and global strategies but excluding the services of the Private Asset Management group.

A complete list and description of all of the Firm's composites and/or a presentation that adheres to the GIPS® standards are available upon request. Additional information regarding the firm's policies and procedures for calculating and reporting performance results is available upon request

Other Literature

You have successfully subscribed.

Notify me by email when
regular data and commentary is available
exceptional commentary is available
new articles become available

Thank you for your continued interest