Menu Our services in the selected location:
  • No services available for your region.
Select Location:
Remember my selection
Your browser is out of date.

BRAVING THE BEAR

July 20, 2022  |  9 Minute Read


 

The S&P 500 officially entered bear market territory in June 2022, posting the worst first-half performance since 1970. Amid heightened uncertainty but still-elevated funded levels, plan sponsors are taking a closer look at liability-hedging, hibernation, and de-risking strategies.

 

Corporate Pension Quarterly 2Q 2022: Braving the Bear highlights potential investment approaches and strategies to consider in the face of market volatility as plans approach their “end state” portfolios.

 

 

Historical Aggregate S&P 500 Funded Status1

 

Inflation expectations, central bank policy, and economic growth were key drivers of market volatility in the second quarter. With asset returns more negative than liability changes, our we estimate is that pension asset returns were -5.7% and -12.9% for the month and quarter, respectively.

Source: Goldman Sachs Asset Management as of June 30, 2022. Funded statuses reflect monthly estimates with the exception of year-end data.

 

Distribution of Funded Status

 

In light of heightened uncertainty, our estimate of the funded status for the aggregate S&P 500 plan fell from 98% on March 31st to 95% on June 30, 2022.

Source: Goldman Sachs Asset Management. As of June 30, 2022.
E = Estimated by Goldman Sachs Asset Management.

 

 

Portfolio Manager Perspectives: Evaluating the "End Point"


Jared Dickow

Multi Asset Solutions Group, Goldman Sachs Asset Management

Jared Dickow


 

How should plans evaluate whether their “end point” funded status is appropriate and what should the end state portfolio framework look like?

The end point on a glide path should align with a portfolio’s final objective. For hibernation, enough of a reserve is needed to minimize the likelihood of ever making another cash contribution. For termination, it is the level at which the plan is expected to be able to terminate with no additional contributions. An end state portfolio should seek to minimize funded status risk for a target return in excess of the liability (“surplus return”). The target surplus return should be built around the sponsor’s objectives and constraints, such as whether the sponsor intends to hibernate the plan or pursue a plan termination. Additionally, the sponsor’s willingness to utilize cash to bridge the gap to termination/hibernation, as well as their risk tolerance, play a key role in determining the target surplus return.

 

How should sponsors think about the role of private market securities in an end state portfolio?

Private market securities can often continue to play an important role in an end state portfolio because many pensions are in an ideal position to take on material illiquidity risk and benefit from the expected returns associated with that risk. While this is especially true for portfolios in a hibernation state, it can also be appropriate for sponsors who plan to eventually terminate their plan to use shorter duration or more liquid privates. Recently, we have seen increased interest from sponsors to include both investment grade and non-investment grade private credit as part of their liability-driven investing program. Other private assets, such as private equity and real assets, can also help to enhance returns and reduce risk when incorporated into a portfolio otherwise dominated by public market securities.

 

Building on that, if a sponsor may ultimately want to engage in a large scale risk transfer or a complete termination of their plan, how much should that influence what its end state portfolio may look like?

A sponsor that wishes to ultimately terminate its plan may consider reducing or ending new commitments to private market securities with a long tail. Either liquidating those positions or delivering them “in kind” to an insurer to pay for a group annuity contract to cover participants may result in a markdown that may be unattractive for the sponsor. Nonetheless, for sponsors that may only aspire to do a partial risk transfer as opposed to complete termination, an allocation to private markets may still be appropriate for the remaining portfolio. Additionally, shorter duration assets such as credit or secondary funds may continue to provide attractive opportunities with a more appropriate time horizon.

 

For years we talked about bifurcating portfolios between immunizing and return-generating. As we get closer to end state, this line seems more blurred. Should plans simply think about the portfolio holistically?

Yes, a holistic view may be the appropriate way to approach an end state portfolio, especially for sponsors envisioning a hibernation strategy. A focus on the level of surplus return generated by the total portfolio, which is often dominated by liability-hedging investment-grade fixed income securities at or near the end state, can become particularly important as plans will likely still require some level of return to cover the costs to maintain the plan (e.g. administrative expenses, PBGC premiums, actuarial losses). When considering the immunizing and return-generating assets separately, it is possible for a plan sponsor to lose sight of the ultimate goals of an end-state portfolio: minimizing surplus risk while generating sufficient surplus return to maintain the plan.

 

 

Strategy in Focus: Custom Liability-Driven Investing

To ensure their portfolio’s fixed income allocation is helping to minimize surplus risk, many plans have adopted custom liability driven investing (LDI) programs, whereby the assets are managed in relation to the plan’s underlying liabilities. Oftentimes these programs include the use of derivatives, such as interest rate swaps and futures. According to CIO Magazine’s 2021 LDI Survey, 61% of plans currently use derivatives as part of their LDI programs.

 

 

Greater Percentage of Portfolio in LDI

 

Source: CIO Magazine Liability-Driven Investment Survey. As of November 2021.

 

download

Save A Copy of this PDF

Corporate Pension Quarterly 2Q 2022: Braving The Bear

Related Insights

  • GSAM Connect

    The Recession Question

    05 July 2022 The current Federal Reserve (Fed) hiking cycle comes amid a historically tight labor market, an inflation overshoot, and an equity market drawdown, inviting recessionary concerns. While US growth may skew to the downside, our base case does not include a recession in the near future. We believe the Fed can engineer a soft landing—or a healthy growth deceleration without a US recession. Read More
  • GSAM Connect

    The Micro Footprints Of Macro Risks

    29 June 2022 Household finance can provide differentiated micro-level perspectives into macro business cycles. In today’s accelerated monetary tightening cycle, the risks of equity selloff and a housing slowdown are top of mind. The timing of policy actions will be important for limiting the transmission of asset price weakness into credit risk, and the choices consumers make will help determine the path of the household credit cycle and the depth of any economic downturn that may result. Read More
  • Market Know-How

    Market Know-How 2H2022: Catch Me If You Can

    23 June 2022

    Central banks and inflation are the two main actors in a play not seen in decades. After many unexpected twists and turns, inflation has continued to be a dominant theme, fueled by tight labor markets, supply chain dynamics, and geopolitical tensions. In the US, the Fed has credibly embarked on policy tightening to rein in price pressures. Elsewhere, other major central banks also stand ready to "catch" inflation, though with different policy paths relative to the US.

    Read More

Start the Conversation

Committed to providing you with the insights you need to build your practice.

 

1Estimate is based on US plans (where specified) of pension plans within the S&P 500. 2. S&P 500 and Bloomberg Agg figures represent total returns.

2Using estimates of asset/liability returns and volatility.

Disclosures

De-risking strategies should not be construed as providing any assurance or guarantee that as a result of applying the strategy an investor will reduce and/or eliminate risk, as there are many factors that may impact end results such as interest rates, credit risk and other market risks.

Alternative investments often are speculative, typically have higher fees than traditional investments, often include a high degree of risk and are suitable only for eligible, long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite period of time. They may be highly illiquid and can engage in leverage and other speculative practices that may increase volatility and risk of loss.

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.

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 Goldman Sachs Asset Management 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 Goldman Sachs Asset Management 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 Goldman Sachs Asset Management has no obligation to provide any updates or changes.

United Kingdom: In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority.

European Economic Area (EEA): This material is a financial promotion disseminated by Goldman Sachs Bank Europe SE, including through its authorised branches ("GSBE"). GSBE is a credit institution incorporated in Germany and, within the Single Supervisory Mechanism established between those Member States of the European Union whose official currency is the Euro, subject to direct prudential supervision by the European Central Bank and in other respects supervised by German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufischt, BaFin) and Deutsche Bundesbank.

Switzerland: For Qualified Investor use only – Not for distribution to general public. This is marketing material. This document is provided to you by Goldman Sachs Bank AG, Zürich. Any future contractual relationships will be entered into with affiliates of Goldman Sachs Bank AG, which are domiciled outside of Switzerland. We would like to remind you that foreign (Non-Swiss) legal and regulatory systems may not provide the same level of protection in relation to client confidentiality and data protection as offered to you by Swiss law.

Asia Pacific: Please note that neither Goldman Sachs Asset Management (Hong Kong) Limited (“GSAMHK”) or Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H ) (“GSAMS”) nor any other entities involved in the Goldman Sachs Asset Management business that provide this material and information maintain any licenses, authorizations or registrations in Asia (other than Japan), except that it conducts businesses (subject to applicable local regulations) in and from the following jurisdictions: Hong Kong, Singapore, Malaysia, India and China. This material has been issued for use in or from Hong Kong by Goldman Sachs Asset Management (Hong Kong) Limited, in or from Singapore by Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H) and in or from Malaysia by Goldman Sachs (Malaysia) Sdn Berhad (880767W).

Australia: This material is distributed by Goldman Sachs Asset Management Australia Pty Ltd ABN 41 006 099 681, AFSL 228948 (‘GSAMA’) and is intended for viewing only by wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth). This document may not be distributed to retail clients in Australia (as that term is defined in the Corporations Act 2001 (Cth)) or to the general public. This document may not be reproduced or distributed to any person without the prior consent of GSAMA. To the extent that this document contains any statement which may be considered to be financial product advice in Australia under the Corporations Act 2001 (Cth), that advice is intended to be given to the intended recipient of this document only, being a wholesale client for the purposes of the Corporations Act 2001 (Cth). Any advice provided in this document is provided by either Goldman Sachs Asset Management International (GSAMI), Goldman Sachs International (GSI), Goldman Sachs Asset Management, LP (GSAMLP) or Goldman Sachs & Co. LLC (GSCo). Both GSCo and GSAMLP are regulated by the US Securities and Exchange Commission under US laws, which differ from Australian laws. Both GSI and GSAMI are regulated by the Financial Conduct Authority and GSI is authorized by the Prudential Regulation Authority under UK laws, which differ from Australian laws. GSI, GSAMI, GSCo, and GSAMLP are all exempt from the requirement to hold an Australian financial services licence under the Corporations Act of Australia and therefore do not hold any Australian Financial Services Licences. Any financial services given to any person by GSI, GSAMI, GSCo or GSAMLP by distributing this document in Australia are provided to such persons pursuant to ASIC Class Orders 03/1099 and 03/1100. No offer to acquire any interest in a fund or a financial product is being made to you in this document. If the interests or financial products do become available in the future, the offer may be arranged by GSAMA in accordance with section 911A(2)(b) of the Corporations Act. GSAMA holds Australian Financial Services Licence No. 228948. Any offer will only be made in circumstances where disclosure is not required under Part 6D.2 of the Corporations Act or a product disclosure statement is not required to be given under Part 7.9 of the Corporations Act (as relevant).

Canada: This presentation has been communicated in Canada by GSAM LP, which is registered as a portfolio manager under securities legislation in all provinces of Canada and as a commodity trading manager under the commodity futures legislation of Ontario and as a derivatives adviser under the derivatives legislation of Quebec. GSAM LP is not registered to provide investment advisory or portfolio management services in respect of exchange-traded futures or options contracts in Manitoba and is not offering to provide such investment advisory or portfolio management services in Manitoba by delivery of this material.

Japan: This material has been issued or approved in Japan for the use of professional investors defined in Article 2 paragraph (31) of the Financial Instruments and Exchange Law by Goldman Sachs Asset Management Co., Ltd. This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities.

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.

Date of first use: 7/19/2022.

284672-OTU-1637532

Please enter your email address to continue reading.

Confirm Your Access


An email has been sent to you to verify ownership of your email address.

Please verify the link in the email by clicking the confirmation button. Once completed, you will gain instant access to our insights.

If you did not receive the email from us please check your spam folder or try again.