The State of U.S. Corporate Pensions

Episode Summary

Executive Summary: Mike Moran said rising interest rates in 2021 materially improved U.S. corporate pension funded status after a 2020 gap between strong asset returns and weak funding progress caused by low rates. He urged sponsors to lock in gains by aligning assets with liabilities, while noting the shift toward lower-return portfolios and broader implications for investors facing a tougher return environment.

Main Topics: 2020 Funding Shortfall Despite Strong Returns (Priority: 5/5): Corporate pension assets rose strongly in 2020, but funded status often deteriorated because lower interest rates increased the present value of liabilities. This created a disconnect between portfolio performance and plan health. 2021 Interest Rate Rebound Improves Funding (Priority: 5/5): Rising long-term yields in 2021 reduced pension liabilities and boosted funded levels, producing a meaningful system-wide recovery after the COVID-era stress period. De-risking and Liability Matching Strategy (Priority: 5/5): Moran recommends sponsors review asset allocation and shift toward duration-matched fixed income to better match bond-like pension obligations and reduce future funded-status volatility. Scale and Persistence of U.S. Defined Benefit Plans (Priority: 4/5): Although many companies have frozen or closed pension plans, tens of thousands of corporate DB plans still cover millions of participants and remain an important part of retirement security. Investor Outlook Beyond Pensions (Priority: 4/5): The same macro backdrop implies a more challenging return environment for a traditional 60/40 portfolio, pushing investors toward private assets, active management, and opportunistic strategies. Broader Portfolio Repositioning (Priority: 3/5): Moran suggests rising rates, high equity valuations, and muted expected returns may lead pension and other investors to seek alpha, diversification, and tactical flexibility.

Key Arguments: Strong 2020 market returns did not translate into better pension funding because low rates increased liabilities faster than assets grew. Higher bond yields in 2021 lowered liability values and lifted aggregate corporate pension funded status. Pension sponsors should use improved funding to de-risk by matching assets to liabilities rather than chasing return. Duration-matched fixed income is the most direct way to hedge the interest-rate sensitivity of pension obligations. Even when plans are frozen or closed, liabilities persist for decades, so funding discipline remains important. Broader investors face a tougher next few years because bonds may return less, equities are expensive, and a 60/40 portfolio may struggle to earn 5% annually. Private assets, active public strategies, and opportunistic sleeves may become more attractive in a lower-return world.

Data Points: Corporate DB plans in the U.S.: Over 20,000 - Moran said this is the approximate number of remaining corporate defined benefit plans. People covered by corporate DB plans: Almost 25 million - He cited the number of participants still covered by those plans. 2020 portfolio returns: Around 12% to 16% - Many plans posted actual asset returns in this range across their total portfolios. 2021 30-year bond yield move: Up about 70 basis points - The rise in long-term yields reduced liabilities and improved funded status. Aggregate funded status: About 94% funded - Goldman Sachs research estimate for U.S. corporate pensions in aggregate. Funded status improvement since COVID trough: Up over 15 percentage points - Improvement from the depth of the COVID crisis in March 2020. Traditional portfolio outlook: 60/40 may struggle to achieve even 5% nominal annual return - Moran’s view of expected returns over the next few years. Market valuation level for U.S. equities: 10th decile valuation - He noted U.S. equities had reached all-time highs and high valuation territory.

Pivotal Quotes: "the main factor causing this dynamic of strong asset returns, yet funded status not improving, is that low interest rate environment that increased the value of pension liabilities" — Mike Moran: Explaining why 2020 pension funding did not improve despite strong market performance. "our work would suggest. That in aggregate, corporate pensions are now about 94% funded" — Mike Moran: Describing the improved aggregate funding position in 2021. "the next few years may be challenging from an asset allocation and returns perspective" — Mike Moran: Discussing the broader investment outlook beyond pensions.

Implications: Pension sponsors may increasingly de-risk by matching liabilities, while investors overall may need to accept lower expected returns and diversify into private assets, active strategies, and opportunistic allocations.