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Corporate Pension Quarterly 1Q 2022

Rates on the Move

Funded levels moved sideways in 1Q 2022 as falling liability values from rising interest rates and widening credit spreads offset declines in asset values. With funded status still at its highest point in years, considerations around the diversification of liability driven investment portfolios have become top of mind for some plan sponsors.

Corporate Pension Quarterly 1Q 2022: Rates on the Move highlights potential investment approaches and addresses some hurdles plan sponsors may face moving forward.

Historical Aggregate S&P 500 Funded Status

Though funded status for the aggregate S&P 500 universe continues to show strength, we estimate that pension asset returns were -0.6% and -7.4% for the month and quarter, respectively.

 

Source: Goldman Sachs Asset Management as of March 31, 2022. Funded statuses reflect monthly estimates with the exception of year-end data.

Q&A with Our Team

As funded status levels have risen for corporate DB plans over the last 12 to 18 months, many plan sponsors have increased their allocations to investment grade fixed income. As a result, some plan sponsors have considered diversifying their corporate bond exposure by investing in other high quality fixed income asset classes

 

 

Matt Maleri

Multi-Asset Portfolio Manager, Goldman Sachs Asset Management

 

What are some of the headwinds facing traditional investment grade corporate bonds?

While high quality corporate bonds have been the cornerstone of hedging portfolio for many years, these assets may face some hurdles going forward. For example, the investment grade corporate universe is concentrated, exposing investors to sector and name specific risks that are not inherently present in plans’ underlying liabilities, such as an issuer, or a broad set of related issuers, being downgraded to below investment grade.  More specifically, the top 10 issuers constitute 17% of the broad investment grade index and 52% of the index is made up of just three industries (Financials, Healthcare, and Communications).

 

What is the opportunity set of so-called “long duration alternatives”?

When defining the opportunity set for high quality investment grade alternatives in a hedging portfolio, it is important to determine whether an instrument’s duration, volatility, return and liquidity attributes are suitable for a hedging portfolio. For instance, certain alternative asset classes may be very high quality, but lack sufficient return potential to compete with high quality corporate credit, while other alternative assets may have attractive return and credit quality attributes, but are insufficiently liquid to be considered good options for the hedging portfolio. Some common examples of assets being considered by plan sponsors include private placement corporates, collateralized mortgage obligations and commercial mortgage loans.


Matthew Maciaszek

Fixed Income Portfolio Manager, Goldman Sachs Asset Management

 

Who are these alternatives fixed income asset classes appropriate for?

For most sponsors, there is likely an opportunity to include alternative fixed income exposures within the plan’s hedging portfolio.  The appropriateness of certain asset classes and their overall weight in a portfolio, however, will likely be guided by a plan’s specific circumstances and objectives.  The factors that plan sponsors may want to consider include the plan’s funded ratio, status (e.g. frozen, closed, open) and size. Plan sponsors that are willing to accept more volatility in relation to their liabilities may find some of these alternative fixed income sub asset classes more attractive.

 

Are there other approaches that plan sponsors can take to improve portfolio outcomes?

Typically, investment grade fixed income alternatives are used to generate incremental return and improve diversification in hedging portfolios.  From our vantage point, derivatives can be an effective risk management tool which may help plans achieve similar outcomes.  For example, thoughtful utilization of instruments such as Treasury futures and interest rate swaps may permit the total capital allocated to the hedging portfolio to be used more efficiently.  The dollars freed up in this manner can be used to increase exposure to 1-10 year intermediate corporate bonds or to lean more aggressively into return-seeking assets outside of the hedge portfolio.

Strategy in Focus: Corporate Pension Plan "First Take"

Goldman Sachs Asset Management recently completed its 20th annual US corporate pension review.  Our “First Take” analysis is a comprehensive review of the 50 largest corporate DB pension plans by assets from companies in the S&P 500 and is based on information filed in each company’s annual 10-K report. Read more in our full report HERE.

 

Wide Dispersion in Plan Returns

 

Actual asset returns were largely dependent on a plans’ allocations to equities and fixed income

EROA Assumptions Continue their descent

 

Continuing a trend from the last two decades, expected return assumptions moved lower

Mixed Signals on Asset Allocation

 

Despite improvements in funded status for all plans, allocation shifts by plan sponsors were not consistent

Related Insights

General Disclosures

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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.

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: 4/14/2022. 

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