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Corporate Pension Quarterly 4Q 2021

Ending on a High Note

2021 witnessed multiple fiscal stimulus bills, rising interest rates, and ongoing concerns regarding inflation. These factors have not waned since entering the new year and have caused many DB plan sponsors to evaluate their 2022 strategies.

In Corporate Pension Quarterly 4Q 2021: Ending on a High Note, we provide a review of markets in the fourth quarter and share our 2022 outlook for DB plan sponsors.

Historical Aggregate S&P 500 Funded Status

In December 2021, funded status for the aggregate S&P 500 universe finally reached 100%.

 

Source: Goldman Sachs Asset Management as of December 31, 2021. Funded statuses reflect monthly estimates with the exception of year-end data.

Strategy in Focus: 2022 Corporate Pension Plan Preview

Transitory or Persistent: How concerned should plan sponsors be about inflation?

While the current inflation environment may present challenges for asset class returns going forward, there is likely less need for plan sponsors to worry about the impact of inflation on their liabilities. In the U.S., most corporate plan liabilities are not sensitive to inflation and so higher levels of inflation will not impact future benefit payments.

 

There is an argument to be made that higher inflation may be a good thing for defined benefit plan sponsors. Should higher inflation lead to higher interest rates, plans that are less than fully funded and/or less than fully hedged to their liability may see an increase in their funded status.

Q&A with Our Team

Michael Moran

CFA, Senior Pension Strategist, Goldman Sachs Asset Management

 

How did the passage of last year’s fiscal stimulus bills impact corporate pension plan sponsors?

The original funding relief, introduced by MAP-21 in 2012, was set to phase out last year, but the introduction of the ARPA raised the floor back to 95%, retroactive to 2020, with the phasing-out process set to begin in 2026. The infrastructure bill passed in November further pushed that phase-out back to 2030. Ultimately, these changes allow plan sponsors to utilize a much lower liability value for purposes of calculating contribution requirements. Additionally, for single-employer plans, the enacted legislation allows plan deficits to be amortized over 15 years, rather than the prior period of 7 years.


Matthew Maciaszek

Fixed Income Portfolio Manager, Goldman Sachs Asset Management

 

What actions might plan sponsors wish to consider in light of the current market environment and the recent funding relief?

Although we generally believe that plan sponsors should not make significant changes in response to recent relief, we understand that plan sponsors’ objectives and time horizons may vary. For many plan sponsors, contributions will likely be limited in the coming years given the extended amortization period and extension of funding stabilization. As such, some plan sponsors may be inclined to take on additional risk in an effort to reducing funding deficits prior to contributions coming due. That said, this approach would likely lead to higher volatility on the sponsor’s balance sheet and income statement given the lack of change to GAAP accounting. Further, in the event that a higher risk portfolio results in portfolio losses, contributions may be higher than they otherwise would have been when the funding stabilization wears off.

 

But we have seen increased interest and growing risk transfer activity in 2021, with the dollar volume of transaction activity more than double what was seen in the second quarter of 2020, and we expect that the longer-term trend of growing risk transfer activity is back on track.

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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.

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Date of first use: 1/13/2022. 264742-OTU-1536145