Public work is a different ballgame, but in the private sector, defined benefit pensions have largely been replaced by 401(k) plans. However, there’s still a massive amount of pension liabilities floating around in the market, and with mass retirement setting in, how those funds are managed can affect retirees everywhere – regardless of work history.

“There remains $1.8 trillion in assets in the largest 100 public companies’ pension plans, according to benefits consultant Milliman. Strong market returns have been a tailwind for pension plans, with the funded status of the programs at the best level (98.4%) since before the global financial crisis and up from 86.7% last March,” says Nationwide’s Mark Hackett.

In simple terms, as more pension recipients enter retirement, managers of that capital usually dial back risk, meaning elevated fixed income exposure. That can skew return assumptions lower because bonds are less risky than equities.

“These programs face demographic challenges as the percentage of workers at or near retirement grows. These challenges contributed to a gradual adjustment in fixed income allocations in pension portfolios, from 29% in 2005 to 51% in 2020. This shift occurred despite the yield on the 10-year Treasury falling from 4.4% to 0.9% over the same period,” adds Hackett.

The swelling ranks of retirees are forcing investors to embrace more bond allocations at a time when interest rates are at historic lows.

“The demographic shift is forcing investors into fixed income despite the dramatic drop in yield, and thereby lowering overall return assumptions,” adds Hackett. “Fixed-income mutual funds have attracted $1.9 trillion in new assets since the end of the financial crisis, while equity funds have lost $1.3 trillion. Given the current level of interest rates and credit spreads, this could impact return assumptions and the retirement outlook. Equity markets have seen a record surge in inflows over the last several months, but there is little indication of a shift in risk tolerance that could drive a structural shift in asset allocation.”

Bond funds may get some support from pension managers, but the risk there is that pension funds may not have enough equity exposure moving forward.

For more on income strategies, visit our Retirement Income Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.