2022: 10 things that defined the year in pensions

A combination of rising yields, declining equity markets and a strengthening dollar made 2022 a challenging year for many investors, but pension fund levels improved year over year, according a new report.

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The end of 2022 and beginning of 2023 saw volatile markets that were difficult in most asset classes. Inflation remained high, while markets ended the year on a down note. But a new report from asset manager Insight Investment, US Pension Market, shows that moderating inflation and a clearer idea of the terminal level of rates should help to stabilize sentiment.

If the upward trend in yields draws to a close, says the report, the level of income available in credit markets should be sufficient to generate attractive long-term returns, with spreads at levels that could be overcompensating investors even in a scenario where default rates are at historically extreme levels.

Related: 81% of public sector workers worry about having enough money for retirement

However, 10 things, according to Insight Investment, marked the trends that defined last year. They include:

  1. Inflation peaked at a higher level than expected – Inflation started the year at levels uncomfortably above the Fed’s inflation target and gained further momentum through the first half of the year. Inflationary pressures were exacerbated by the Russian invasion of Ukraine, which pushed the prices of several key commodities upwards. The headline Consumer Price Index peaked at 9.1% year on year in June before slowly moderating. The consensus forecast for inflation started the year at 3.9% and ended the year at 7.5%.
  2. The Fed raised rates aggressively – The beginning of the year saw interest rates between 0% to 9.25%. By the end of the year rates peaked at 4.5%. Further rate hikes are expected but will peak about mid-year.
  3. Bond yields moved upwards – The yield curve shifted upwards, most notably in shorter maturities. Longer-maturity yields moved upwards, but to a lesser degree.
  4. Credit spread widens – The Bloomberg Corporate Credit Index ended the year with a spread of 130bp, 38bp higher over the year. At the long-end of the credit curve, BBB-rated issuers underperformed other credit segments, with the spread of the Bloomberg Long BBB Corporate Credit Index widening by 39bp to end the year at 193bp.
  5. The growth outlook softened – The consensus forecast for 2022 US growth was 3.9% at the start of the year. Consensus forecasts for 2023 also declined, from 2.5% at the start of the year to just 0.3% by the end of December.
  6. Equity markets declines – The combination of softening growth forecasts, tighter monetary policy and higher yields acted as a significant headwind to equity markets.
  7. The US dollar soared – The dollar broadly appreciated over the year.
  8. The ESG debate heated up – Individual states started to look at an ESG approach in investment.
  9. Pension fund status improved – Insight maintains two model pension indices. The Traditional Pension Index aims to reflect those plans that have not yet adopted liability driven investment. The LDI Pension Index aims to reflect those plans that have adopted LDI in the fixed income portion of their portfolio. The funded status of the Traditional index increased by 10% and the LDI index increased by 1.8%.
  10. Multi-employer plans were rescued – The Pension Benefit Guarantee Corp (PBGC) released its 2021 Fiscal Year Projections Report, with the Multi-Employer Insurance Program showing an improved financial outlook, largely as a result of the Special Financial Assistance Program (SFA) enacted in the American Rescue Plan.

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