FTSE Pension Liability Index and FTSE Pension Discount Curve

Created in 1994, the FTSE Pension Liability Index is a widely used tool for plan sponsors and actuaries to value defined-benefit pension liabilities in compliance with the SEC’s and FASB’s requirements on the establishment of a discount rate. The index also provides an investment performance benchmark for asset-liability management. By monitoring the index’s returns over time, investors can gauge changes in the value of pension liabilities.

Traditionally, future liabilities have been marked to market using yields available on AA-rated corporate bonds, complying with US GAAP and IFRS regulations. However, pension funds are increasingly investing across other investment-grade ratings and diversifying across credit types.

The FTSE Pension Liability Index family now offers coverage across a variety of rating buckets and credit sectors to better reflect pension liability-driven investments.

FTSE Russell offers customization options that accommodate investor-specific liability schedules, use alternate construction of the initial universe of bonds, or calculate credit exposure of pension liabilities.

Index-linked products

Society of Actuaries: FTSE Pension Discount Curve

Derived from the FTSE Pension Discount Curve, the FTSE Pension Liability Index reflects the discount rate that can be used to value liabilities for GAAP reporting purposes. Along with the rate, monthly returns and durations for the index’s liabilities are made available.

FTSE Pension Discount Curve

A set of yields on hypothetical AA zero coupon bonds whose maturities range from 6 months up to 30 years. The yields of the FTSE Pension Discount Curve are used to discount pension liabilities.

The FTSE Pension Discount Curve is calculated based on a universe of AA rated corporate bonds from the FTSE US Broad Investment Grade Bond Index (USBIG®) and the yields of FTSE Russell’s Treasury model curve.

FTSE Pension Liability Index

The FTSE Pension Liability Index represents the single discount rate that would produce the same present value as calculated by discounting a standardized set of liabilities using the FTSE Pension Discount Curve.

Along with the rate, monthly returns and durations for the FTSE Pension Liability Index liabilities are also made available.

The FTSE Pension Discount Curve is constructed by combining two curves: the Treasury Model Curve and spread curve of the relevant universe. For instance, for the double-A corporate bond universe in the standard FTSE Pension Discount Curve, the Treasury Model Curve is taken from the Yield Book as is and the double-A corporate spread curve is generated using the following steps:

From the FTSE USBIG Corporate Bond Index, create an universe of corporate bonds with rating of Aa1, Aa2, and Aa3 by Moody’s or AA+, AA, and AA- by Standard & Poor’s.
Remove callable bonds with less than three years of call protection and less than ten points between the earliest call price and the market price.
Divide the bonds into five maturity buckets: 1-3 years, 3-7 years, 7-15 years, 15-25 years, and 25+ years.
Within each maturity bucket, remove any bonds with an option-adjusted spread (OAS) of more than two standard deviations above the market-weighted option-adjusted spread within the bucket. The option-adjusted spread is calculated as the spread to the Treasury Model Curve.
Calculate the market-weighted average OAS of the remaining bonds in each maturity bucket.
The spread curve is then interpolated between the averages from each bucket, assuming the averages are “placed” at the mid-point of each bucket (except for the 25-30 year bucket, in which case the average is placed at the 29.5 year point).
Combine the spread curve with the Treasury Model Spot Curve to create a spot double-A corporate curve.

In addition to the FTSE Pension Liability Index, FTSE Russell offers an Above Median version of each curve and liability index. These variants select for the bonds with an OAS above the median of their respective maturity bucket, in the bond selection process. FTSE Russell delivers separate files for each Above Median Curve/Index.

Index Family
FTSE Pension Liability Index	FTSE Above Median Pension Liability Index
FTSE Pension Liability AAA Index	FTSE Above Median Pension Liability AAA Index
FTSE Pension Liability A Index	FTSE Above Median Pension Liability A Index
FTSE Pension Liability BBB Index	FTSE Above Median Pension Liability BBB Index
FTSE Pension AAA/AA Liability Index	FTSE Above Median Pension AAA/AA Liability Index
FTSE Pension AAA/AA/A Liability Index	FTSE Above Median Pension AAA/AA/A Liability Index
FTSE Pension Liability Investment-Grade Index	FTSE Above Median Pension Liability Investment-Grade Index
FTSE Pension Liability Investment Grade Broad Bond Index, excl. Treasuries	FTSE Above Median Pension Liability Investment Grade Broad Bond Index, excl. Treasuries