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2022 US Corporate Pension Review and Preview

I Want to Break Free

2021 may be remembered as the year in which corporate defined benefit plans finally broke through the funded status ceiling. After treading water for much of the last decade, the aggregate GAAP funded status for plans in the S&P 500 finally reached 100% last year. Rising interest rates, along with continued strong performance from equity markets, led to higher funded levels for most plans.

While the rise in funded status was certainly a welcome outcome, the path forward for plan sponsors may not be as easy. There is uncertainty related to inflation, interest rate volatility has increased, credit spreads are at historically tight levels and US equity markets are trading near record highs. In US Corporate Pension Review and Preview: I Want to Break Free, we recap the last 12 months and look forward at the themes we believe will be relevant for plan sponsors in 2022.

Funded status rose to the highest levels in years  

 

We estimate that the aggregate GAAP funded level of US corporate defined benefit (DB) plans was higher by 11 percentage points 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 2020, are estimated and unaudited as of December 31, 2021, and are subject to potentially significant revisions over time. Past performance does not guarantee future results, which may vary.

Funding levels finally improve as interest rates rise and asset returns remain strong  

 

At the end of 2020, the aggregate funded status for plan sponsors in the S&P 500 was approximately 89%. Although interest rates bounced around during the last 9 months of the year, we estimate that the aggregate funded status ended 2021 at approximately 100% funded. 

 

Source: Goldman Sachs Asset Management, company reports; as of December 2021. Figure does not sum due to rounding.

LOOKING FORWARD: WHAT’S AHEAD FOR PLAN SPONSORS IN 2022

Will funding relief impact plan sponsor behavior?

 

Plan sponsors may be questioning the need to hold long duration bonds given that liability values for contribution requirement purposes won’t react to changes in market interest rates (due to the corridor calculations included in the current pension funding relief).  Any decision around whether or not to adjust investment strategy and asset allocation due to funding relief will likely be based on the specific goals, objectives and circumstances of the sponsor and the plan. 

 

From our perspective, we generally believe that plans will want to continue with their current hedging strategies given that balance sheet and income statement liabilities will continue to be driven by market rates. As we have seen, opportunities to de-risk can be fleeting, so we generally suggest that plan sponsors consider moving down their glide path. As always, factors related to the plan beyond its funded level, such as plan materiality and whether the plan is open, closed or frozen, may also be relevant.

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2022 US Corporate Pension Review and Preview Disclosures

General 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 is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities.

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.

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.

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.