Retirement plans slapped by harsh 2022

Last year was not a memorable one for retirement plan sponsors. At least not in a positive sense. Despite a continuing economic recovery from the COVID-19 pandemic and coming off a prior fiscal year with near-record investment returns, the tables were turned in 2022.

Returns plummeted, with plan assets falling close behind. The list of Pensions & Investments‘ 1,000 largest retirement plans is littered with asset drops of 15% to 20%. It was the largest percentage decline in the top 1,000 since P&I began publishing the list in the late 1970s. Nearly $2 trillion in assets was wiped out in 12 months.

Some of that is timing, as P&I‘s report reflects data as of Sept. 30 and markets have had a little bit of a bounce back since then. But the reality is that in a year in which equity and bond markets tumbled in tandem, it became clear which retirement plans were more prepared for a high inflationary environment. Alternatives provided a ballast to investment returns as plans were rewarded for higher allocations to areas such as real estate, private equity and private credit. Those that relied on a portfolio more closely resembling a traditional 60% equity/40% bond mix quickly realized there was nowhere to hide.

Everything looked rosy a year ago when assets in the top 1,000 soared by 16.9%, but P&I cautioned in these pages that concerns over inflation, higher interest rates and overheated private market valuations could be major headwinds. Inflation and rising rates have been a constant the past year, but private market valuations have mostly held up … for now. That will certainly be put to the test this year as the U.S. and much of the world stare down a possible recession.

Alternatives industry insiders said much of the 2022 write-downs from private markets managers are not expected to be reflected in investors’ portfolios until March or April.

Pension funds have continued to pump more money into alternative asset classes and that has provided them plenty of protection, as well as impressive returns. That will make 2023 a crucial year as investors await the Federal Reserve to stop, or even reverse, its tightening policy that has seen the federal funds rate start to approach 5%.

After years of public pension plans making headway in their funded status, another year of double-digit losses in stock and bond markets would put these sponsors, and defined contribution savers, in a precarious position.

Stress testing different market scenarios and investment options in an increasingly uncertain economic environment will be crucial. Rising rates have benefited corporate pension plans, especially those employing a liability-driven investing strategy, and those plans will also need to maintain discipline to lock in those funding gains and avoid the funding pressure that resulted from past market downturns.