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2021 Defined Benefit EROA Assumptions

How Low Do You Go?

Each and every year hundreds, if not thousands, of Defined Benefit plan sponsors go through an exercise of developing an Expected Return On Assets (EROA) assumption for their plans. While this exercise is familiar to many plan sponsors, and is required in many circumstances to comply with accounting and financial reporting requirements, there are still many questions as to how plan sponsors should develop an EROA assumption. As such, we believe our annual refresher on EROA assumptions is likely helpful to many plan sponsors.

How Low Do You Go? seeks to provide context on what we have observed plan sponsors doing over the last 12 months, describe certain practices on setting an EROA assumption and, ultimately, outline a set of expectations that takes into account today’s environment. Importantly, our work continues to suggest that even though many institutional investors have lowered these assumptions in recent years, meeting even these reduced expectations may still be a challenge.

Average EROA assumptions for corporate and public DB plans continue to decline

EROA assumptions for DB pension plans have been on a downward trend for many years.  Last year was no exception as the average EROA assumption for corporate and public DB plans declined yet again.

 

Source: Goldman Sachs Asset Management; company reports; Center for Retirement Research at Boston College; all data through FYE 2020.

Illustrative Forecasted Returns for Representative Portfolios

As we’ve done in prior years, we have outlined our view on some illustrative portfolios above. In addition to three common illustrative portfolios, we have also included two illustrative portfolios intended to be representative of typical corporate and public DB plan allocations.

 

For Illustrative Purposes. 60/40 portfolios and De-Risked portfolio are hypothetical portfolios based on common industry standards. The average S&P 500 pension plan is based on company reports. U.S. public DB plan is for illustrative purposes only and based on various industry surveys. As of August 18, 2020.

Meeting EROA assumptions in the coming years may be a challenge

With interest rates at historically low levels and US equity markets near all-time highs, generating strong returns going forward may be a challenge.

 

Probabilities are based on our forward looking capital market assumptions: and represent the number of outcomes in our Monte Carlo simulation that meet the return target specified. The economic and market forecasts presented herein have been generated by Goldman Sachs Asset Management for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see appendix in 2021 Defined Benefit EROA Assumptions: How Low Do You Go? for detailed portfolio allocations.

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Disclosures

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.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by GSAM and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR).  It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates.  Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes.

THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant.

This material is provided for informational purposes only. It is not an offer or solicitation to buy or sell any securities.

Strategic Long Term Assumptions

Alpha and tracking error assumptions reflect Multi-Asset Solutions (MAS) estimates for above-average active managers and are based on a historical study of the results of active management. Expected returns are estimates of hypothetical average returns of economic asset classes derived from statistical models. There can be no assurance that these returns can be achieved. Actual returns are likely to vary. Please see additional disclosures..

The data regarding strategic assumptions has been generated by MAS for informational purposes. As such data is estimated and based on a number of assumptions; it is subject to significant revision and may change materially with changes in the underlying assumptions. MAS has no obligation to provide updates or changes. The strategic long-term assumptions shown are largely based on proprietary models and do not provide any assurance as to future returns. They are not representative of how we will manage any portfolios or allocate funds to the asset classes.

This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives.

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.

Confidentiality

No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

© 2021 Goldman Sachs. All rights reserved. Date of first use: 8/19/2021 249981-OTU-1462626