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For the first time in more than a dozen years, U.S. pension funds have returned to surplus. These pension funds have to cover pension obligations over decades. The present value of these commitments constitutes their liabilities. To do this, they invest their assets in the financial markets.
Last year saw the value of their investments fall by 18%, in line with the sharp decline in equity and bond markets. However, at the same time, the effect of rising interest rates on the discount rate reduced their liabilities by 27%. This discount rate, which roughly corresponds to the yield to maturity of investment grade corporate bonds, rose from 2.8% to 5.2%.
This situation will probably have an impact on the investment strategy of pension funds. Indeed, a ratio below 1 encourages pension funds to invest in equity markets or in offensive credit to try to make up for this deficit through good performance. On the contrary, pension funds with a surplus can build a less risky portfolio that covers their needs. In this context, they could therefore reduce their equity portfolio in the near future.
The opinion expressed above is dated February 3, 2022 and is subject to change.
See also: https://latribune.lazardfreresgestion.fr/en/fixed-income-in-2022/
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