US Pension Market quarterly | Insight Investment | Insight Investment

Despite secondary lockdowns in some states as they attempted to stem the spread of the Delta variant, the economy recovered strongly. The unemployment rate declined from 6.7% at the end of 2020 to 4.2% by November, with jobless claims dropping to levels not seen since 1969. Although the new Omicron variant adds to uncertainty, economic momentum should continue into 2022 with labor markets continuing to tighten.

The rapid recovery in demand, outpacing the rate at which supply chains could rebuild capacity, squeezed prices upwards in certain sectors, compounded by elevated shipping costs and soaring commodity prices. We believe that inflation should slowly moderate in 2022 as supply chains fully reopen and base effects pass out of the data.

Following the November 2021 FOMC meeting, Fed Chair Jerome Powell indicated that the Fed would start to taper their bond purchase program from December 2021. Purchases of US Treasuries were reduced by $10bn per month, with the purchase of agency paper reduced by $5bn per month. This was then accelerated to $30bn. Speculation is now growing that rate rises will rapidly follow the end of tapering with the first potentially in March 2022.

After speculation that President Biden may choose an alternative candidate, the reappointment of Jerome Powell as Fed chair provides stability for markets. Powell’s four-year term ends in February 2022. Dr. Lael Brainard, widely perceived to be one of the more dovish members of the FOMC, will take over as vice chair. Several vacancies remain.

With the economy recovering and the Fed announcing that it would taper its bond purchase program, yields moved upwards and the curve flattened. Over the year, 10-year Treasury yields increased by 54bp to 1.44%, and 30-year Treasury yields increased by 18bp to 1.91%. Credit spreads tightened, with the spread of the long-maturity Bloomberg Corporate Index declining by 4bp to 92bp.

Although investment grade debt issuance was below the record levels of 2020, it was above what was expected at the start of the year. Issuers continued to take advantage of beneficial market conditions to term out maturities and lock in low funding levels. In high yield markets, issuance experienced another strong year, with gross issuance 12% above 2020 levels.

With corporate earnings surging to record highs, equity markets had a strong performance; the S&P 500 Index gained 28.7% and the tech-heavy NASDAQ index gained 27.5%.

The combination of rising discount rates, reducing the present value of liabilities, and strong returns from growth assets led to a significant improvement in funded status among US pension plans.

• The Act extended and enhanced the Interest Rate Stabilization mechanisms brought in over the last decade, allowing plans to discount liabilities using 25-year average interest rates, with a 5% floor, instead of more current ‘marked to market’ rates. The Act also significantly reduces near-term contribution requirements.
• Multiemployer pension plans in critical and declining status are eligible for $86B of Special Financial Assistance grants from the PBGC. Multiemployer plans are created via an agreement between multiple employers and a union, so generally have plan members across a single industry. The assets injected into these plans as part of the bailout must be held separately from other plan assets and invested into investment-grade bonds.

Following a consultation by ICE Benchmark Administration, the company announced that it would continue to publish US dollar LIBOR until June 30, 2023, after which it would cease¹. Other international LIBOR rates ceased to be published on December 31, 2021. In addition, the Adjustable Interest Rate (LIBOR) Act of 2021² dealt with ‘tough legacy’ contracts, allowing contracts that reference LIBOR but which don’t have adequate fallback provisions to be moved to reference the Secured Overnight Financing Rate (SOFR) once LIBOR ceases to be published without the need to change the contract.