3 days ago
Pension funds won't save the bond market
Pension funds are in a healthier financial state than they have been in many years. That is good news for their beneficiaries, but not great for the long-term bond market, or the private-equity industry.
Only a slice of Americans in private employment these days have the benefit of a corporate defined-benefit retirement plan. Yet corporate pension funds still represent a major force in the markets, with more than $3 trillion in assets, according to Federal Reserve data.
Pension funds have been a driver behind the growth and success of the private, alternative investment industry. And they are key players in the market for corporate and government bonds because they have long future payout obligations that can match those securities' long duration. So when they start to change what they do, it is a big deal.
Thanks to strong equity returns and rising yields in recent years, corporate pension plans have made a big jump in how well their assets can cover their future obligations.
Back in 2020, the 100 largest U.S. public-company corporate defined-benefit pensions in an index tracked by actuarial and consulting firm Milliman had an aggregate funded ratio of 88%. Some of the largest pensions in the index include those sponsored by automakers Ford Motor and General Motors, along with aerospace companies RTX and Boeing.
Then at the end of 2024, Milliman's tracker showed a ratio of 101%. It was the first time since 2007 the index had reached full funding.
This is a big change that investors should consider as they weigh the recent move up in yields on 30-year Treasury bonds. The question is whether that move, sparked in part by worries about the U.S.'s future fiscal deficit, represents a lasting shift in yields. Yields on 30-year Treasurys in May touched 5.15%, near their highest level since 2007, and are still trading around 5%.
With full funding and with many corporate pension plans being 'frozen" to new beneficiaries, their focus can increasingly shift away from chasing returns to catch up. Instead, they can focus on matching their assets and liabilities and keeping enough liquidity on hand to make their continuing payouts.
Getting to a derisking point for some pensions has been aided by a lot of buying of bonds that could effectively match up with their long-term liabilities. But from here, many pensions might be thinking not only of shifting out of riskier equities, but also out of the longest-term bonds and into more intermediate-dated ones as their pool of beneficiaries ages.
This dynamic has arguably been one factor at play at the long end of the bond market, meaning in the bonds with the furthest-away maturities. U.S. Treasury data tracked by research analysts at Bank of America show a drop-off in demand for a form of long-term Treasury securities popular with pension funds in the early months of 2025.
'You don't see the same strong demand from well-funded pensions for bonds at the long end of the curve," says Meghan Swiber, U.S. rates strategist at Bank of America.
Besides shifting into more medium-term bonds, it also can make sense for funds with aging beneficiaries to wind down some relatively illiquid investments, including private equity, in favor of ones that can be more readily sold when needed.
'As funded status increases, it's time to take risk off the table," says Gary Veerman, head of institutional solutions at investment manager Capital Group. 'Illiquidity now can be a big headwind to pensions."
Government-employee pension plans typically have a different mix of assets than private corporate plans. They are often far more underfunded. Milliman's index of 100 large public plans, including large state and local plans, had a funded ratio of around 80% as of April. Unlike a 'frozen" private pension plan, an active public pension can also still be adding new beneficiaries.
These funds often rely much less on fixed income, instead seeking out the higher returns on equities, both of the public and private variety. The index of public pensions' allocation to fixed income has been roughly 20% in recent years, according to Milliman's most recent annual study, versus more than 50% for the index of corporate pensions.
Of course pension funds are hardly the only buyers of long-term Treasurys, or the only partners in private-equity funds. The recent rebound performance of stocks, and the climb in yields, might lead some funds to rebalance. And more pension funds might opt to grab long-term bonds if yields keep rising.
Both Wall Street and Washington should be watching these funds' next moves closely.
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