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Public Pension Quarterly 3Q 2022

November 22, 2022  |  7 Minute Read

Equity and fixed income markets continued to print negative returns in 3Q as elevated inflation reports and the resultant magnitude of Federal Reserve rate hikes dampened investor sentiment. Ongoing volatility and the positive correlation between equity and fixed income returns year-to-date led to a continued decrease in aggregate funded status for US public pension plans.


In our latest edition of the Public Pension Quarterly, we highlight significant market movements in the third quarter, provide an update on the latest industry news affecting pension plans, and outline common questions that are top of mind for public plan CIOs in the current market environment.



Quarterly Snapshot


  • The third quarter continued to see sticky inflation prints, driven by shelter, wage, and commodity components. US central bank policy therefore proved more hawkish than expected, contributing to broad sell offs across both equity and fixed income markets.
  • The magnitude of the Federal Reserve’s rate increases and resulting expectations of tighter financial conditions and slower economic growth led to lower returns across risk assets in the quarter, with the S&P 500 posting a return of -4.9%.
  • Fixed income markets similarly experienced negative returns during the quarter as interest rates moved higher, with 10Y US Treasury yields rising +82 basis points (bps) and the US Agg ending at -4.8%.
  •  We estimate that in aggregate, public pension asset returns were approximately -5.8% in the third quarter, resulting in the estimated aggregate funded status for US public pension plans declining -4pp from an estimated 71% on June 30th to 67% on September 30th.


Exhibit 1: Market Performance1


Source: Goldman Sachs Asset Management. As of September 30, 2022.


Exhibit 2: Historical Aggregate S&P 500 Funded Status2


Source: Boston College Center for Retirement Research and Goldman Sachs Asset Management. As of September 30, 2022. Funded status reflects estimated asset returns and liability growth.


Market Perspectives


Amid persistent inflation, higher rates, and slowing growth, both equity and fixed income markets have delivered double-digit negative returns year-to-date. As a result, public plans are now facing some of the lowest returns seen in over a decade. We outline some common questions that are top of mind for public plan CIOs in the current market environment.



What are some of the key macro and market issues that public plan CIOs are monitoring today?

Inflation remains a top concern for public plans, both from a real return perspective as well as due to the loss of purchasing power that retired members are currently facing. While many plans have dedicated real return allocations, certain inflation-sensitive asset classes, such as Real Estate Investment Trusts (REITs) and Treasury Inflation-Protected Securities (TIPS), have not delivered positive returns year-to-date.


Plans are also concerned about ongoing geopolitical risks, as the Russia-Ukraine war continues and US-China tensions persist. This has contributed to challenged returns across plans’ international equity allocations, leading several plans to review the geographical mix of their public equity portfolios.


Lastly, plans may be finding themselves over-allocated to privates due to lagged marks and the recent decline in public markets (“denominator” effect). While many are maintaining discipline as they wait for private market valuations to eventually reprice lower, holding large illiquid positions that have drifted from target may pose a challenge for some plans.



How has the current market environment impacted public plan performance this year?

Elevated beginning of year valuations and an unfavorable mix of growth and inflation have led to broad sell-offs across public markets. Equity and fixed income markets, which typically exhibit negative correlations, are facing drawdowns in tandem. Therefore, plans’ risk-managing allocations, which include high quality fixed income instruments, were not able generate positive returns as intended for times of slower economic growth and equity market drawdowns.


The few plans that did post positive returns in latest fiscal year saw the negative returns in public markets offset by allocations to real assets in private markets, such as private real estate and infrastructure.


However, with public pension return targets at approximately 7%3 on average, plans’ returns have printed well below target this year. When dealing with investment losses, plans face the challenge of determining how to make up the shortfall.



Are there any lessons to be learned from previous periods of enhanced volatility, like the global financial crisis in 2008 or the downgrade of US debt in 2011?

Public plans have an investment horizon that is much longer than any individual market cycle. Therefore, we believe plans should stick to their strategic asset allocation to the extent possible, as it was designed to deliver robust returns over the longer-term and across multiple cycles.


Even so, plans may need to rebalance their portfolios as they see fit. Due to meaningful drawdowns for some asset classes, and the relative outperformance of others, plans’ actual allocations may have shifted from their target ranges. As plans navigate making these portfolio adjustments, investment staff should maintain frequent communication with their board and other key stakeholders.



Public plans have the benefit of being long-term investors. What longer-term opportunities are in the market today?

Private market strategies continue to garner attention as investors seek diversified sources of returns in what is expected to be a lower return and more alpha-driven investment environment going forward. From an inflation perspective, investors are turning to real assets (real estate and infrastructure) as well as private credit strategies, i.e., assets that are short duration and/or allow for contract adjustments. In private equity, we see attractive opportunities in the secondary market, where sellers seeking liquidity in the current environment may capitulate to accept lower pricing.


Recent breakthroughs across scientific disciplines have created attractive investment opportunities in the innovation space, with life sciences in particular garnering greater attention from private market investors. Life Sciences comprises 67%4 of healthcare venture funding, rapidly expanding on the back of sustained growth in funding and research, technological advancements, cross-discipline innovation, and supportive policies from regulatory bodies. From an investor perspective, new financing models may be required to support company formation and development, providing a timely opportunity for investors to capitalize on the growth of the sector.



In Focus: Navigating the Financial Vortex


Investors face a complex backdrop due to rising interest rates and market volatility, creating a challenging environment to generate sustainable income, and causing a strain on one’s finances.


This year’s Retirement Survey & Insights Report, Navigating the Financial Vortex: From Retirement Readiness to Retirement Income, highlights these hardships and considers possible paths forward. Our report explores the diverse needs of two key audiences: those still working and those who have already retired.


Our findings are from 1,566 individuals surveyed in July and August 2022 and provide insights from a diverse set of perspectives, including (i) working individuals (967 working individuals across generations – working Baby Boomers, Generation X, Millennials, and Generation Z), (ii) retired individuals (599 retired individuals (age 50-75)), and (iii) gender and generational breakdowns for both populations.


Learn more with our full report.


Source: Goldman Sachs Asset Management’s Retirement Survey & Insights Report, published October 2022.

Summary of Tactical Asset Class Views


Source: Investment Strategy Group. Asset class views as of November 10, 2022. The Investment Strategy Group (“ISG”) is part of the Consumer and Wealth Management Division of Goldman Sachs and is not a part of Goldman Sachs Global Investment Research or Goldman Sachs Asset Management. Information and opinions expressed by individuals other than Goldman Sachs employees do not necessarily reflect the view of Goldman Sachs. Goldman Sachs does not provide accounting, tax or legal advice to its clients. Please see appendix for additional details on the above viewpoints. Views 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.



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1 Figures represent total returns. Real estate performance represented by Dow Jones Global Select Real Estate Index. Hedge fund performance represented by HFRX Global Hedge Fund Index.

2 Sample reflects approximately $3 trillion in total assets across over 130 US state and local plans in the Boston College Center for Retirement Research public pension dataset. Past performance does not guarantee future results, which may vary.

3 Source: Boston College Center for Retirement Research. As of FY 2021.

Source: PitchBook. As of December 31, 2021. Statista. As of February 28, 2021. Grand View Research. As of March 1, 2022.


The views expressed herein are as of 9/30/2022 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.

Equity securities are more volatile than bonds and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies.

Bonds are subject to interest rate, price and credit risks. Prices tend to be inversely affected by changes in interest rates.

High yield fixed income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment grade fixed income securities.

Investments in foreign securities entail special risks such as currency, political, economic, and market risks. These risks are heightened in emerging markets.

An investment in real estate securities is subject to greater price volatility and the special risks associated with direct ownership of real estate.

Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

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.

Alternative Investments by their nature, involve a substantial degree of risk, including the risk of total loss of an investor's capital. Fund performance can be volatile. There may be conflicts of interest between the Alternative Investment Fund and other service providers, including the investment manager and sponsor of the Alternative Investment. Similarly, interests in an Alternative Investment are highly illiquid and generally are not transferable without the consent of the sponsor, and applicable securities and tax laws will limit transfers.



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.

Goldman Sachs does not provide legal, tax or accounting advice, unless explicitly agreed between you and Goldman Sachs (generally through certain services offered only to clients of Private Wealth Management). Any statement contained in this presentation concerning U.S. tax matters is not intended or written to be used and cannot be used for the purpose of avoiding penalties imposed on the relevant taxpayer. Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the U.S. federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind. Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction.

The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.

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.

The views expressed herein are as of 6/30/2022 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.

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.

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.

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.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

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.

Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. It should not be assumed that investment decisions made in the future will be profitable or will equal the performance of the securities discussed in this document.

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Index Benchmarks

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.

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

Bloomberg US Aggregate Bond Index represents an unmanaged diversified portfolio of fixed income securities, including US Treasuries, investment grade corporate bonds, and mortgage backed and asset-backed securities.

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Date of first use: November 22, 2022. 298659-OTU-1704379

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