The Natixis Investment Managers Solutions team monitors asset classes, investment products and market action, both in real time and from a historical perspective. See which trends had the greatest impact on institutional asset allocation decisions in the final months of 2021.

Public Pension Funded Status Showed Dramatic Improvement
Amidst a strong return environment for equities and other risk assets, the median public pension returned 25.8% in Fiscal 2021.1 This has led to massive improvement in funded status for state and local pension plans. Preliminary reports suggest that the average state system added 10% in funded status between Fiscal Year 2020 and Fiscal Year 2021 on a market value basis.

Estimated Funded Status Improvement, FY 2020 to FY 2021
Chart showing the Estimated Funded Status Improvement of each state system in the United States of America for the fiscal year of 2020 to the fiscal year of 2021
Source: National Association of State Retirement Administrators, Equable, Natixis Investment Managers Solutions

COLA, Anyone?
Elevated inflation throughout 2021 has led to a higher than average Cost of Living Adjustment (COLA) for many retirees. Roughly 75% of pension plans sponsored by state and local governments contain some automated COLA provisions, while others make ad hoc adjustments. Beginning in January 2022, Social Security recipients will see their payments increase by 5.9%, the largest increase since 1982.2

Underfunded Corporate Pension Plans Face Escalating Premiums
Escalating flat-rate and variable-rate premiums owed to the Pension Benefit Guaranty Corporation (PBGC) have made it prohibitively expensive to maintain underfunded corporate pension plans. The annual premium owed for a hypothetical plan shown below has more than quadrupled since 2013, further incentivizing plan sponsors to close funding gaps and offer lump sums or annuities to remove participants from their books. Premium increases after 2019 are indexed to inflation.

PBGC Premiums: Sample Plan
Chart showing a sample plan of Pension Benefit Guaranty Corporation (PBGC) which offers $500m liabilities, 90% funded, to 5,000 employees
Sources: PBGC, Natixis Investment Managers Solutions. Sample plan is $500m in liabilities, 5,000 employees, 90% funded status on PBGC basis for each year shown.

Private Equity Shines
After lagging broader equity markets for several years, eye-popping private equity returns helped lift many institutional investment programs in 2021. Return dispersion remained high with top quartile private equity programs returning as much as 50% in the first 9 months of 2021 alone. The “endowment model” used by many large philanthropic investment pools, which calls for over-allocating to alternative investments and under-allocating to fixed income, was particularly in favor, helping to lift endowment & foundation returns above other plan types.

Public vs. Private Equity ReturnsReturn by Investor Type
Public vs. Private Equity Returns, Return by Investor Type for Fiscal Year 2020 to Fiscal Year 2021
Source: InvMetrics

Dry Powder Returns
Institutional money market funds saw positive flows throughout most of 2021, with balances climbing back near the initial post-Covid peak in Q2 2020. This figure includes cash held by corporate treasurers (future capex spending, buybacks, or dividends) as well as institutional investment dollars (future flows to equity, fixed income, and alternatives), supporting future earnings growth and providing a bid for future asset prices.

Money Market Assets (1/3/18–12/29/21)
Money Market Assets from January 3, 2018 to December 29, 2021
Sources: Natixis Investment Managers Solutions, Bloomberg

1 National Association of State Retirement Administrators

2 National Association of State Retirement Administrators, Social Security Administration

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