Corporate Pension Quarterly 4Q 2024: Income Incoming
Quarterly Snapshot
Our estimate of the funded status for the US corporate pension system decreased marginally at year-end to 106.3%, in line with the previous quarter-end. Asset returns were negative, offsetting a decrease in the value of liabilities due to interest rates moving higher over the quarter.
Source: Goldman Sachs Asset Management. As of December 31, 2024. Funded status reflects monthly estimates. Exceptions apply to year-end data, which are actual.
In 2024, US equities returned 25% and became the second consecutive year of double-digit gains. The S&P 500 index hit all-time highs 59 times in 2024, and 64% of returns were driven by the top 10 names in the index alone.
Interest rates trended higher in 4Q, which raised our discount rate proxy by 60 bps and subsequently decreasing the value of aggregate pension liability by an estimate of 7.2%.
Recent strength in the employment report suggested that the US labor market remains strong across the board, with solid job gains, a tick down in unemployment rate, and steady wage growth. Our colleagues in the Fixed Income team believe the Federal Reserve may have a dovish outlook with a delayed timeline for a potential total of two rate cuts this year in March and June. Read more in our Fixed Income Outlook 1Q 2025.2
Source: MSCI, Bloomberg, and Goldman Sachs Asset Management. As of December 31, 2024. Percentage changes represent total returns. The economic and market forecasts presented herein have been generated by Goldman Sachs Asset Management and Goldman Sachs Global Investment Research for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Past performance does not guarantee future results, which may vary.
In The News
Updated Due Date Schedule for PBGC Premiums
Recently, the PBGC notified plan sponsors of an earlier premium due date schedule for the 2025 plan year.
For example, calendar year pension plans’ premium due date for 2025 has been brought forward to September 15, a month earlier from the original October 15 deadline. The same one-month move applies to off-calendar year pension plans.
The change in due date was based on the Bipartisan Budget Act of 2015 legislation signed 9 years ago allowing 2025 premiums to count as revenue in the 10-year budget forecast for reporting purposes.
The updated schedule is reported to only apply for the 2025 plan year. Premium due dates are schedule to return to the regular deadlines in 2026.
2025 Review and Preview: The Tipping Point Recap
The US corporate pension system remains well-funded on average after multiple years of strong asset returns and interest rates higher relative to rates of the last decade. Hence, we may see an acceleration of plan actions given the current state of the system. Our takeaways of the paper include:
- We expect more assets may have moved into the liability hedging bucket in 2024, and heightened interest rate levels may provide an opportunity for plan sponsors to take de-risking actions and effectuate asset allocation changes.
- On top of asset allocation shifts into liability hedging asset classes, some plan sponsors continue to explore governance models through an outsourced chief investment officer or a lift-out, and risk transfer remains a potentially valuable tool in the pension risk management toolbox.
For additional details, read more in our 2025 Review and Preview: The Tipping Point.
Updates on Annuitization-Related Activity
- In December, retirees from the Verizon Communications’ pension plan had sued the company and independent fiduciary State Street Global Advisors (SSGA), alleging they violated fiduciary duties in connection with pension risk transfer (PRT) activity. In the same month, Weyerhaeuser Co. retirees filed a lawsuit against the company and SSGA with similar allegations. The insurers involved in both transactions were not named defendants in either case.
- The ERISA Industry Committee, a nonprofit group representing large employers in roles as pension plan sponsors, filed an amicus brief earlier in the quarter in the General Electric (GE) case filed earlier in the year. The brief backs GE’s motion to dismiss and PRT activity more generally.
Elevated Annuitization Volume in 3Q 2024
The Life Insurance Marketing and Research Association (“LIMRA”) reported that there were 203 single premium pension buy-out transactions totaling $13.1 billion in 3Q 2024, representing a 62% increase year-over-year in the transaction amount. 8
Source: News releases, company reports, and Goldman Sachs Asset Management. As of December 31, 2024. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. Please see additional disclosures at the end of this presentation. Company names and logos, excluding those of Goldman Sachs and any of its affiliates, are trademarks or registered trademarks of their respective holders. Use by Goldman Sachs does not imply or suggest a sponsorship, endorsement or affiliation.
Portfolio Manager Perspectives
Why should institutional investors consider income generating strategies when the consensus remains bullish on the equity market going forward?
When uncertainty is high, as it is now given high equity market valuations and policy changes in Washington, it’s important to find ways to build resilience and return consistency into portfolios. Steady streams of income can help investors deliver a smoother ride through market cycles. Once captured, income can be reinvested in the next new opportunity, making income a potentially powerful form of diversification in its own right. We believe the appeal of stable income is heightened in an uncertain world where macroeconomic and policy uncertainty could drive dispersion and volatility.
How could corporate pension plans benefit by incorporating income-generating strategies like US investment grade credit in their portfolio?
Many US corporate pension plans have been moving down their glide paths in recent years and shifting asset allocation into more liability hedging high-quality fixed income products to de-risk the plan. Increasing allocations to instruments like long credit serve to help hedge a plan’s interest rate and credit spread risks.
In addition to hedging benefits, credit provides steady income streams to serve as an incremental source of cash flow to meet a plan’s current and near-term cash outlays in either the form of benefit payments to plan participants or other use cases, such as lump sums. With contribution activity at a multi-decade low, plans need to raise cash for outflows, and income generating assets like long credit can help with managing those liquidity needs. While spreads are indeed tight, higher rates mean the yields on credit are at one of the highest points over the last decade.
For corporate plans looking to diversify fixed income allocations beyond investment grade credit, where do the opportunities lie?
Securitized credit offers low correlation to traditional fixed income and typically higher yields than similarly- rated corporate bonds. We see some opportunities across asset-backed securities, collateralized loan obligations, and commercial mortgage-backed securities.
We are monitoring the new US Administration's potential impact on securitized sectors. Pro-growth policies combined with lower rates and a more stable supply-demand balance could improve the prospects for office commercial real estate, while looser regulations could boost M&A and LBO activity, leading to a strong year for leveraged loans and new collateralized loan obligation supply.
Where can investors look for income generation outside of the fixed income universe?
While valuation expansion drove most equity returns globally in 2024, estimates suggest that earnings and dividends may become greater drivers of index returns in 2025. A focus on companies with strong fundamentals and financially sustainable dividend yields may enhance stability of returns and provide a buffer against large market corrections.
Companies in international markets, specifically in Europe and Japan, have historically exhibited stronger commitment to paying dividends to shareholders. This can be accretive to the income generating potential of a sponsor’s portfolio.
Source: Goldman Sachs Asset Management. As of January 2025. For discussion purposes only. “M&A” refers to mergers and acquisitions, and “LBO” refers to leveraged buy-outs. For discussion purposes only. There is no guarantee that objectives will be met. Diversification does not protect an investor from market risk and does not ensure a profit. De-risking strategies should not be construed as providing any assurance or guarantee that as a result of applying the strategy an investor will reduce and/or eliminate risk, as there are many factors that may impact end results such as interest rates, credit risk and other market risks.
Strategy In Focus
When the level of uncertainty is high, it may be helpful to build resilience and return consistency into portfolios. Income can help investors deliver a smoother ride through market cycles. We see opportunities to ride the easing economic cycle, capture income through credit, and use dynamic investment approaches to gain exposure across sectors and regions.
Fixed Income for All Seasons
Our outlook for fixed income remains favorable across different macroeconomic conditions – whether in a soft-landing scenario or an acceleration in US economic activity. With an active investment approach, investors may be able to capture income opportunities across the various fixed income segments.
Opportunity Set for Income
We believe the combination of a return of yield relative to the last cycle, sound corporate fundamentals, and the Fed’s commitment to extend the US economic expansion, may enable investors to earn attractive income across fixed income spread sectors like corporate and securitized credit.
The Case for a Dynamic Approach
- In a phase of economic change, new geopolitical alliances, and post-election policy shifts, we believe dynamic investment strategies have the potential to serve as a strategic complement to core bond allocations in 2025.
- Varying timeline, pace, and scales of central bank actions may create different opportunities across different interest rate markets; high political uncertainty and structural shifts may also provide additional reasons to dynamically adjust sector, rating, and duration allocation.
- An active approach underpinned by fundamental and quantitative research may provide incremental opportunities in return generation and income opportunities for institutional investors.
Source: Goldman Sachs Asset Management. As of October 2024. There is no guarantee that objectives will be met.
*GAAP funded status estimates are based on US plans (where specified) of defined pension plans within the S&P 500 (i.e., 238 companies with pension data per GS Asset Management analysis).
2Goldman Sachs Asset Management. As of January 2025.
3Average asset-weighted return of S&P 500 companies’ US defined benefit plans. For 2023, uses average asset returns based on disclosed data. When not disclosed, estimates asset returns based on actual asset returns (in dollars) and average asset value.
4Mix of MSCI EAFE and MSCI ACWI ex-US.
5Mix of Corporates (Bloomberg US Aggregate Bond Index), High Yield (iShares US High Yield Index), Treasuries, and Long Credit (iShares Long US Credit Index).
6Discount rate proxy measured by 50% Moody’s AA Corporate Bond and 50% US Long Duration Corporate Bond. For 2023, uses average discount rate change for December year-end filers.
7Estimated Change in Plan Liabilities based on increase in estimated discount rate and duration of 12. For 2023, uses average actuarial gains / losses as a percentage of starting Projected Benefit Obligation.
8Source: LIMRA Group Annuity Risk Transfer Survey. As of 3Q 2024, latest available as of publication.
