2013 could be the year that more U.S. corporate defined benefit plans kick in their liability-driven-investing strategies if equity markets and bond yields continue to improve, according to an analysis of pension data by Goldman Sachs Asset Management.
Such a change would stem a trend in 2012 during which pension executives at the 50 largest S&P 500 companies' plans, representing two-thirds of all DB assets among sponsors in the index, maintained their aggregate fixed-income allocation at 39%. The aggregate equity allocation slipped three percentage points to 39%, and real estate and other, primarily alternative, investments rose to a combined average of 22%, from 19%, Michael Moran, New York-based pension strategist at Goldman Sachs Asset Management, said in an interview. Mr. Moran authored a GSAM white paper, “Pension Review First Take: Deja Vu All Over Again.”
He said triggers to increase fixed-income investing, such as increases in interest rates and funded status, weren't reached in 2012. “We know so many plans have glidepaths or dynamic asset allocations in place, but often the triggers haven't been hit yet,” Mr. Moran said.
One big impediment remains discount rates, which fell to an estimated 4% in 2012 from 5.8% in 2009 and 7.2% in 2002. But Mr. Moran sees some hope for their improvement. “In a low-rate environment, equity prices and bond yields can go up together,” Mr. Moran said, citing research from Goldman Sachs Investment Management Division's investment strategies group that there's a positive correlation between stock prices and fixed-income yields until risk-free rates compete with equity returns. According to the research, that inflection point coincides with 10-year Treasury yields of about 6%; yield forecasts for the end of 2013 hover around 2.25%.
If that correlation continues, “you could see some dramatic moves in funded status,” Mr. Moran said.
The aggregate funded status slipped a percentage point in 2012, to 78%, but among the 50 pension plans studied, that rate was expected to rebound to an estimated 83% in the first quarter of this year, cutting those plans' combined underfunding to an expected $253 billion from $332 billion in 2012, a 24% improvement.