State Street Quarterly DB Insights: Inflation Management for Defined Benefit Plans

Senior Investment Strategist
Senior Investment Strategist

US Corporate Pension Plan funded status has increased to its loftiest levels since the global financial crisis, buoyed by continued strength in the equity markets and other return-seeking asset classes. While sponsors have enjoyed strong asset returns, an accelerator to funded status improvements in the first half of 2021 came from a welcome rise in long-term interest rates and therefore liability discount rates.

As plan sponsors seek to maintain the ground they’ve gained, does one of the driving forces behind the rise in interest rates and improved funded status—inflation—become a headwind and source of future asset price volatility? In our view, the impact of inflation on equity and fixed income assets—and therefore on DB plans—depends largely on the macro forces underlying the inflationary regime shift, and whether the new regime is a transitory or a more persistent inflationary environment.

In this quarterly commentary, we will first review changes in the DB funded status landscape year-to-date using Funded Status Review tables. Then we will provide our thesis on inflation and our playbook of strategies for managing inflation risk.