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Goldman Sachs Asset Management Statement on the Russia-Ukraine War. Read it here.    

Pension Review "First Take" 2021

Hold on Tight

In its 20th year, the Pension Review “First Take” by Goldman Sachs Asset Management analyzes the 50 companies in the S&P 500 with the largest US Defined Benefit (DB) plans based on asset values. The publication is designed to provide initial impressions on the issues and factors impacting corporate DB plan sponsors.

At the beginning of 2022, many plan sponsors had cause for celebration as the combination of rising interest rates and strong performance from equity markets led to higher funded levels for most defined benefit plans last year. However, the celebrations may need to be put on hold as market volatility has increased to start the year. Even prior to the development of the Russia-Ukraine War, equity markets faced a challenging start to the year, threatening to erode the funded status gains of 2021.

 

This is not the first time the market has experienced a sharp rise in funded status levels only for market volatility to increase. The good news is that many plan sponsors have instituted de-risking programs in recent years. Specifically, we continue to see some plan sponsors adjust asset allocation in times of rising funded status to better align plan assets with liabilities. Naturally, the goal is to lock in some of the improvement in funded levels, often as part of a glide path strategy.

 

With funded levels at their highest point in more than a decade and with market volatility likely remaining elevated in the near term, Goldman Sachs Asset Management thinks now is an opportune time for corporate DB plan sponsors to revisit their asset allocation and investment strategies and potentially take de-risking actions to secure some of the recent improvements in funded levels.

Key Findings

Elevated Funded Status Levels

Funded status levels were elevated for most of 2021, though we have seen elevated volatility to begin 2022. The current funded status level for the aggregate system is still well above levels since the global financial crisis and close to 20 percentage points higher since the depths of the COVID-19 crisis in late March 2020.

 

Source: Goldman Sachs Asset Management, company reports; based upon the US plans (when specified) of S&P 500 companies, for illustrative purposes only. The 2021 figure published here is preliminary as of March 2022, and is subject to potentially significant revisions over time. The 2022 YTD estimate is as of February 28, 2022.  Actual returns may vary significantly from the performance information presented above.  Past performance does not guarantee future results, which may vary.

Rising Discount Rates

The average discount rate for calendar-year companies increased to 2.9%, an increase of 40 basis points, but still the second-lowest rate in two decades.

 

*Other includes amendments, divestitures, FX and settlements, including pension risk transfer when explicitly disclosed. Source: Goldman Sachs Asset Management; Idaciti; sample size of N= 50; as of March 2022. The 2021 estimate is subject to potentially significant revisions over time. The data used to create the exhibit above is sourced from our First Take sample and for this reason the 2021 funded percentage may not match other historical series within this report. Please see additional disclosures at the end of this presentation. Exhibit does not sum due to rounding. For illustrative purposes only. Past performance does not guarantee future results, which may vary.

Continued Return Dispersion

Dispersion of plan returns continues to largely be a function of differences in asset allocation. Some plans have migrated to very high allocations to fixed income as part of de-risking strategies, while others are more total return focused with equities and other growth-oriented assets comprising the majority of the portfolio.

 

Source: Goldman Sachs Asset Management; Idaciti; sample size of N= 44; As of March 2022. All assets except fixed income are considered to be risk assets. The data used to create the exhibit above is sourced from a subset of the largest pension plans with December fiscal year-ends in the S&P 500 analyzed as part of our First Take sample. Please see additional disclosures at the end of this presentation. Past performance does not guarantee future results, which may vary.

Mixed Signals on Asset Allocation Changes

While some plans ended 2022 with a lower allocation to fixed income than what they had in 2021, even as funded status levels increased, we continue to believe that the path for many plans will be to higher allocations to this asset class as they seek to immunize their liabilities and/or prepare for a risk transfer to an insurer.

 

Source: Goldman Sachs Asset Management; Idaciti; sample size of N= 50; As of March 2022. The data used to create the exhibit above is sourced from a subset of the largest pension plans in the S&P 500 analyzed as part of our First Take sample. For illustrative purposes only. Please see additional disclosures at the end of this presentation. Past performance does not guarantee future results, which may vary.

Aggregate Allocations Largely Unchanged

At an aggregate level, asset allocation was relatively unchanged during 2022. With funded status levels remaining elevated for much of 2021 and into early 2022, we suspect that plans either have or will continue to de-risk further.  Assuming funded status levels remain elevated, we would expect allocations to fixed income to increase in the coming years.

 

Source: Goldman Sachs Asset Management; Idaciti; company reports; based upon the US plans (when specified) of S&P 500 companies, as of March 2022. The 2021 asset allocation is based on an estimate of companies beyond just the 50 largest pension plans in the S&P 500 analyzed as part of our First Take sample and is subject to change as new annual filings become available. As detailed in the appendix, larger pension plans tend to have higher allocations to alternative investments. For this reason, the allocations shown in the chart above may not match other series within this report.

Continued Decline in EROA assumptions

The average expected return on assets (EROA) assumption for the First Take sample fell about 30 basis points in 2021. This continued the long-standing trend of lower return assumptions as some plan sponsors migrate to higher fixed income allocations.  Additionally, forward-looking return expectations continue to decline for many asset classes. 

 

Source: Goldman Sachs Asset Management; Idaciti; company reports; based upon the US plans (when specified) of S&P 500 companies; As of March 2022. The 2022 estimate is based on plans that report a 2022 EROA with additional adjustments. Specifically, the largest DB plans tend to have larger allocations to alternative assets and, therefore, a higher EROA. As such, we have adjusted the 2022 estimate lower to account for differences in asset allocation between the largest plans and the broader S&P 500 plan universe. The data shown above is subject to potentially significant revisions over time. For illustrative purposes only.

General Disclosures

The views expressed herein are as of 3/10/2022 and subject to change in the future. Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein.

THESE MATERIALS ARE PROVIDED SOLELY ON THE BASIS THAT THEY WILL NOT CONSTITUTE INVESTMENT ADVICE AND WILL NOT FORM A PRIMARY BASIS FOR ANY PERSON'S OR PLAN'S INVESTMENT DECISIONS, AND GOLDMAN SACHS IS NOT A FIDUCIARY WITH RESPECT TO ANY PERSON OR PLAN BY REASON OF PROVIDING THE MATERIAL OR CONTENT HEREIN. PLAN FIDUCIARIES SHOULD CONSIDER THEIR OWN CIRCUMSTANCES IN ASSESSING ANY POTENTIAL INVESTMENT COURSE OF ACTION.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

Diversification does not protect an investor from market risk and does not ensure a profit.

The S&P 500 Index is the Standard & Poor’s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices.

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein.

Company names and logos, excluding those of Goldman Sachs and any of its affiliates, are trademarks or registered trademarks of their respective holders. Use by Goldman Sachs does not imply or suggest a sponsorship, endorsement or affiliation.

Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

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Date of first use: March 10, 2022.  271541-OTU-1571687

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