GSAM Predicts a Break in Stagnant Pension Funding Levels

There was little year-over-year variation in defined benefit (DB) Plan funded levels in 2016, according to Goldman Sachs Asset Management’s (GSAM)’s 2016 Pension Review report.

In aggregate, the 50 plans in its report were 81% funded, down marginally from year earlier levels.

Despite actual asset returns which fell around long-term return expectations, the trend of lowering return assumptions continues unabated. Numerous plans lowered this assumption in 2016 and, based on voluntary disclosures of 2017 assumptions, more reductions are occurring this year.

Lower discount rates were a headwind for funded levels. Although 10-year U.S. Treasury yields rose about 20 basis points in 2016, substantial credit spread tightening led many plans to lower this key assumption at the end of the year. Sizable discretionary contributions for some plans helped to, at times, buffer funded levels as well as help to mitigate Pension Benefit Guaranty Corporation (PBGC) variable-rate premiums. GSAM expects this trend to continue in 2017.

GSAM also predicts DB plan funded levels may be on the move as interest rates and equity values rise simultaneously. This would break a multi-year period of stagnant funded ratios, the firm says.

Some plan sponsors have already been on the move, according to the report, with several enacting shifts in asset allocation, making voluntary contributions and engaging in risk transfer exercises, despite the relatively low funded status and interest rate environment.