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.
The views expressed in this material are the views of Thomas J Kennelly and Dane Smith through the period ended July 13, 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Investing involves risk including the risk of loss of principal. Past performance is no guarantee of future results.
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EXP: July 31, 2022