US PensionWatch: Q1 2026 | Insight Investment

The Fed revised up its 2026 inflation forecasts in response to higher oil prices but left its “dot plot” unchanged, still pointing to one rate cut this year. Policymakers appear inclined to look through the energy-driven inflation spike for now, though a prolonged shock risks second-round effects and will remain under close watch.

We update our pension indices in the new era of surplus assets and outline our latest thoughts on cashflow solutions and overlay strategies. As funding levels improve and contributions decline, plans are entering a period of persistent negative cashflows amid higher benefit payments, greater illiquid allocations, and weaker equity-bond diversification. We believe liability-aware, cashflow-focused fixed income portfolios, potentially complemented by overlay solutions, can provide reliable liquidity, mitigate sequencing risk, and stabilise funded status while preserving flexibility to invest in higher-returning assets.

Asset-based finance (ABF) offers potential for a differentiated, customizable source of yield. ABF provides financing backed by hard assets or diversified cash-generating pools, typically offering higher spreads than public credit for comparable risk, albeit with greater complexity and lower liquidity. For insurers and cashflow-aware pension plans, ABF can be particularly attractive given its ability to deliver tailored structures, predictable cashflows and liability alignment. As banks retrench and innovation accelerates, especially in areas such as digital infrastructure and specialist assets, we see this asset class continuing to grow.

Despite macro noise and geopolitical tensions, markets have remained relatively resilient, supported by prior Fed easing and strong AI-driven investment. Although valuation concerns have eased, fiscal pressures and geopolitical risks reinforce the need for selective positioning. We continue to believe investment-grade credit offers attractive all-in yields and resilient fundamentals, favoring a selective approach to high yield amid widening dispersion, and high-quality structured credit.

Rising uncertainty across policy, trade, and geopolitics is increasing risks for investors and policymakers. Forecasting is challenged by policy uncertainty, while there is a risk that the US economy tips into recession with negative consequences for risk assets.

Adoption continues to accelerate, driven by efficiency, programmability and global usability, with the US taking an early lead on issuance and regulatory clarity.