Insights

Three Trends in Public and Taft-Hartley Plans

Plans are reducing risk and continuing to boost private markets allocations

December 13, 2024

Since 2022, public and Taft-Hartley pension plans have benefited from strong equity returns and relatively high interest rates, helping boost funding ratios. Now they are preparing for what comes next.

The Federal Reserve cut rates in September and November and is signaling more cuts in the near future. The equity market outlook is generally strong,¹ but a collection of economic and geopolitical uncertainties cloud the picture. Funded ratios fell in October,² reinforcing the sense that the weather may be changing.

Investment teams need to think carefully about how to navigate this environment. Many are taking proactive steps to reduce risk while maintaining the growth they need to meet liabilities, while looking to private markets for uncorrelated sources of return and income.

Here are three key trends we’re watching among public and Taft-Hartley plans:

Trend: An unclear outlook for funded ratios

The funded ratio of the top 100 public pension plans reached 82.8% in September, 2024 – nearly 10 percentage points higher than a year earlier – then fell to 81.2% in October.³ For their part, Taft-Hartley plans reached an estimated funded ratio of 93% midway through 2024, an increase of four percentage points from year-end 2023.⁴

Now plans are carefully reviewing asset mixes and portfolio design, seeking an optimal balance of risk and growth in the context of a more uncertain market environment.

Trend: Risk mitigation

As funded ratios have grown, many public and Taft-Hartley plans have looked to mitigate risk while maintaining the growth potential they need. For some plans, that means exploring ways to shift asset allocations from equities to fixed income and other asset classes.

Fixed-income sectors outside of investment-grade assets, including high yield, emerging markets debt, and leveraged loans, may play a valuable role in that process. These assets can provide stronger growth potential and less interest-rate risk than investment-grade sectors, with diversified sources of return.

Trend: Increasing allocations to private markets

Eying a cloudy outlook and concerned about potential market disruptions, Public and Taft-Hartley pension plans are looking for ways to boost their portfolios’ resilience. To that end, they continue to increase exposure to alternative and private market investments, seeking sources of income and total return with low or no correlations to public markets.

Meanwhile, plans are exploring ways to manage the challenges that come with larger private allocations. Some are establishing diversified liquidity sleeves that may include high yield debt, public real assets, and/or bank loan index strategies or ETFs, bolstering their flexibility and delivering the efficient access to liquidity needed to complement illiquid alternatives.

For more information about trends and solutions among public and Taft-Hartley pension plans, contact State Street Global Advisors.

Footnotes

Disclosure

For investment professional use only.

Investing involves risk including the risk of loss of principal.

Diversification does not ensure a profit or guarantee against loss.

Bonds generally present less short-term risk and volatility than stocks but contain interest rate risk (as interest rates rise bond values and yields usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities.

Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.

Investing in high yield fixed income securities, otherwise known as “junk bonds”, is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.

Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.

Currency Risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

The views expressed in this material are the views of the Defined Benefit team through the period ended November 30, 2024 and are subject to change based on market and other conditions.

This document may contain certain statements deemed to be forward-looking statements. All statements, other than historical facts, contained within this document that address activities, events or developments that SSGA expects, believes or anticipates will or may occur in the future are forward-looking statements. These statements are based on certain assumptions and analyses made by SSGA in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances, many of which are detailed herein. Such statements are subject to a number of assumptions, risks, uncertainties, many of which are beyond SSGA’s control. Please note that any such statements are not guarantees of any future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.

All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not consider any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

The whole or any part of this work may not be reproduced, copied, or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

United States: State Street Global Advisors, 1 Iron Street, Boston, MA 02210-1641.

7415887.2.1.AM.INST
EXP: 12/31/25

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