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January 2021 | Pension Solutions

US Corporate Pension Review and Preview: Déjà Vu All Over Again

Though 2020 was unique in many ways, US corporate defined benefit (DB) pension plans likely experienced a bit of déjà vu as strong asset returns were once again offset by higher liability values due to lower discount rates. Despite the global pandemic rattling capital markets during the first quarter of 2020, both equity and fixed income markets managed to finish the year with positive performance, led by strong returns for US equities and long duration fixed income.1 Unfortunately for plan sponsors, funded status levels did not increase materially as Treasury yields reached all-time lows and, after a period of widening, corporate bond spreads remained tight. As a result, we estimate the aggregate GAAP funded level of US corporate DB plans was relatively unchanged year-over-year (see Exhibit 1).

Even with falling interest rates, the trend towards de-risking for many plan sponsors continued. As we look ahead, we highlight several themes for plan sponsors in 2021, including potential challenges with meeting expected return on asset (EROA) assumptions, the possibility of funding relief wearing away over the next several years, and the need for interest rate hedging precision, even in today’s low interest rate environment.

EXHIBIT 1: FUNDED STATUS LEVELS RECOVERED FROM THEIR MARCH LOWS, BUT ARE MOSTLY UNCHANGED YEAR-OVER-YEAR

Source: Goldman Sachs Asset Management, company reports; based upon the US plans (when specified) of S&P 500 companies, for illustrative purposes only. All figures above, except for December 2019, are estimated and unaudited as of December 31, 2020, and are subject to potentially significant revisions over time. December 2020 estimate is as of 12/31/20. Past performance does not guarantee future results, which may vary.

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