NEPC’s Brad Smith was featured in a recent PlanSponsor article to discuss the findings of our 2022 Governance Survey. View the article on PlanSponsor’s site here.
Rising interest rates, a potential economic recession and geopolitical tension are the top concerns impacting the portfolio construction of institutional investor organizations in the next six months, according to NEPC 2022 Governance Survey respondents.
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One reason for the emphasis on rising interest rates is the effect rates have on corporate pension funds. Unlike for many investors, “inflation is beneficial for most corporate pension plans,” explained Brad Smith, partner at NEPC and a member of the firm’s corporate defined benefit team, in an email. “Since most U.S. pension plans don’t offer [cost of living adjustment] benefit increases, higher levels of inflation can be a benefit to plan sponsors. “The most immediate impact from higher expected inflation is higher interest and discount rates. As discount rates rise, the estimated value of pension liabilities fall.”
Smith added, “Provided the remaining diversifying assets don’t fall as much as the liability estimates, the plan’s funded status can actually rise. During this recent market environment, we have seen many of our clients’ funded status estimates hold steady despite the significant market selloff.”
NEPC scored the factors, in a range from one to five, with factors expected to have the greatest impact ranked lower, according to the survey.
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