Corporate defined benefit plans did better than you might think during recent volatility

This year, it was April that came in like a lion

Capital market uncertainty escalated in early April to levels not seen since the global financial crisis and the early months of the COVID pandemic in 2020. The result was a spike in the volatility index (VIX^® Index¹), nearly double-digit declines in U.S. equities, and a U.S. Treasury yield curve roller-coaster ride punctuated by liquidity concerns in U.S. government bonds. Global tensions, tariffs, and stagflation became common terms. Negative and rapidly changing headlines impaired consumer confidence, exacerbated by 401(k) balances that dropped sharply for many investors riding the U.S. equity wave.

If you woke from a month-long nap at the end of April, you would have wondered what all the fuss was about. The S&P 500^® finished down less than 1% at the end of the month and core bonds as measured by the Bloomberg U.S. Aggregate Bond Index returned 0.4% during the same time, according to Bloomberg data. Non-U.S. equities—as measured by the MSCI EAFE Index—gained 4.2% and gold prices were up 5.3%, Bloomberg data shows.

The $3 trillion question

At $3 trillion total, defined benefit pension plans in the U.S. are still heavily relied upon. So, how did the typical corporate defined benefit plan fare during this tumultuous period? Not as bad as you might think, which underscores a key tenet for measuring success: know your benchmark.

To provide context: heading into 2024, many defined benefit plans benefitted from strong equity market performance and rising bond yields, which pushed their funded status levels above 100% relative to their liabilities. As funded status improved, many plans were able to de-risk their portfolios along their glide paths by reducing exposure to equities and increasing allocations to long bonds (the proxy for their liabilities). In short, such plans began 2024 with a strong funded status and a more conservative risk posture.

When analyzing defined benefit plan performance, it is important to define the appropriate measure of success. It is not total returns. It is not performance relative to cash or inflation. The true benchmark is the plan’s liabilities, which are driven by changes in long-term corporate bond yields. Therefore, defined benefit plan performance analysis should be framed in the context of its most relevant benchmark: liabilities or changes in funded status (assets performance relative to liabilities).

Funded status remained relatively stable

April’s tumultuous ride started with the typical flight-to-quality that pushed bond yields lower. This was triggered by an equity market sell-off fueled by tariff concerns. As a result, long U.S. Treasuries rallied, and liabilities rose. A typical 50/50 defined benefit plan² lost about 3% in absolute terms and roughly 4% versus liabilities since the end of March, according to Fidelity analysis. Plans with more aggressive allocations fared worse, and those with more risk-controlled strategies did better. So, at the peak of market volatility—when measured versus liabilities—these plans lost 2% to 5% relative to their liabilities, even as U.S. equities were making headlines with declines of 10%–15%, according to our analysis. Given the circumstances, that is a relatively resilient outcome.

The rate rally was short lived, as a combination of factors caused long bond yields to rise sharply mid-month, and liability values declined by an average of 4%, according to Fidelity data. Equities remained volatile, but when comparing pension performance to its appropriate benchmark, funded status was essentially unchanged month-to-date for most plans regardless of asset allocation, using FIAM Pension Journey Pools as a proxy.³ To be clear, markets felt extremely unstable at this point and the average pension plan’s funded status remained unchanged. It was all down to good risk management.

Bonds yields normalized in the second half of April. The yield on the Bloomberg Long U.S. Corporate Index ended the month higher at 5.85%, up only 0.15% from the previous month end. The modest increase in yields resulted in lower liabilities, which fell by just over 1% in total return terms. The typical 50/50 plan ended the month down about 0.5%. However, due to a drop in liabilities, these types of plans lost an estimated 0.5% in funded status. Year to-date, that same 50/50 plan is up about 2.5% and liabilities remain flat, using the same proxy, which, in our view, is a gain in funded status during one of the most volatile periods in years.

De-risking over time, diversification, and hedging

How could the performance of the typical pension plan be so muted relative to headline capital market volatility? First, we have seen the de-risking of pension plans over the years as funded status improved, resulting in long-duration fixed income allocations of more than 50% on average. Second, we believe that pension plans are typically more diversified than other investors. They have benefited from gains in non-U.S. equities (the MSCI EAFE outperformed U.S. equities in April), investing in defensive sectors, and using inflation hedges such as gold. We believe that astute management of these plans with active tilts can be an additional boost.

In summary, while April was turbulent for capital markets, defined benefit plans held up well, thanks to prudent de-risking, diversification, and a focus on liabilities as the true benchmark. The result: A modest decline for the month and a year-to-date gain of approximately 2%, according to our analysis of a typical defined benefit plan client at Fidelity.
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1. The Chicago Board Options Exchange Volatility Index, known as VIX, is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500^® Index call, and put options.

2. 50/50 refers to 50% allocation in return-seeking assets such as equities and 50% allocation in liability hedging assets such as fixed income.

3. FIAM Pension Journey Pools. The pools seek capital growth while hedging varying degrees of interest rate risk typically embedded in traditional annuity obligations of corporate defined benefit plans. This is accomplished by diversifying across a range of equity and fixed income securities. The mix between the two corresponds with typical hedging allocations across a policy glide path.