Pension strength remains robust, report finds

U.S. pensions should remain strong through the remainder of 2025, according to a new report from S&P Global Ratings. You can thank the current stock market rally.

Friday put an exclamation point on the rise in stock prices. The Dow Jones Industrial Average gained 846 points, the S&P 500 gained 96, and the Nasdaq rose by 396 points. 

The first half of the year was equally strong. Because of market returns, many analysts expect pension returns will equal as much as 12% for the fiscal year that ended at the end of June.

Friday’s rally suggests that trend could continue for a while. The surge in stock prices was the result of a keynote speech at the Jackson Hole Economic Symposium. Federal Reserve Chair Jerome Powell signaled that interest rate cuts could be on the table as early as September. He noted that a shifting balance of risks, including a weaker job market, might prompt adjustments to monetary policy.

That was music to investors’ ears. Investors saw this as a dovish pivot, boosting expectations for lower borrowing costs, a positive for equities. Following Powell’s remarks, Treasury yields dropped sharply, helping drive the rally.

The S&P Global Ratings report predicts this year’s strong stock market performance simply adds to the estimated pension returns of 16% to 17% in fiscal 2024. That’s well above the 7% minimum most fund managers want to see in order to feel comfortable.

In the end, stock market performance has a direct and indirect impact on pensions, depending on whether you’re looking at defined contribution plans like 401(k)s and IRAs or defined benefit plans – traditional pensions promised by employers. 

Here’s a breakdown:

1. Defined Contribution Plans (401(k), IRA, etc.)

These retirement accounts are typically invested in stocks, bonds, and mutual funds.

• When the stock market rises: Account balances grow, since equities typically make up a large share of investments. This directly increases retirement savings.
• When the market falls: Account balances shrink, which can reduce expected retirement income unless the losses are recovered before withdrawals.
• Long-term effect: Over decades, stock markets historically trend upward, so downturns usually hurt most if they happen just before or during retirement, when there’s less time to recover.

2. Defined Benefit Plans (Traditional Pensions)

These promise a set benefit in retirement, but the health of the pension fund depends on investment returns.

• Positive market performance: Pension funds often invest heavily in stocks. Strong returns improve funding levels, making it easier for the plan to meet future obligations.
• Poor market performance: Weak returns increase funding gaps, meaning employers (or governments, in public pensions) may need to contribute more money to keep the plan solvent.
• Risk of underfunding: If markets underperform for long periods, some pensions may cut cost-of-living adjustments, reduce future accruals, or—rarely—default if underfunding becomes severe.

3. Broader Economic Linkages

• Interest rates matter too: Pension liabilities are valued based on long-term interest rates. Falling rates increase liabilities, meaning pensions need even better market returns to stay funded.
• Corporate pensions: Companies with underfunded plans may see weaker balance sheets, which can affect stock prices in turn.
• Public pensions: State and municipal pensions are especially sensitive; poor stock performance can lead to tax increases, reduced benefits, or both.

4. Real-World Example

• During the 2008 financial crisis, many pension funds saw double-digit losses. Defined contribution savers close to retirement often had to delay retiring.
• Public pensions became deeply underfunded, and some (like in Illinois, New Jersey, and Detroit’s municipal system) faced long-term solvency issues.
• Conversely, the long bull market from 2009–2021 dramatically improved pension fund health and boosted individual retirement account balances.