Setting ROAs for 2024

The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

Key points

Corporate plan ROAs leveled off in 2022. We believe they may stay level or even increase in 2023 annual pension footnotes, reflecting the higher yields and lower asset valuations we saw going into the year.
Similar to corporate plans, public plan ROA assumptions were unchanged from the prior year. Revision activity in public plan ROA assumptions had picked up somewhat in recent years but was still slower than for corporate counterparts. The latest reported average ROA assumption is 6.9%.
In terms of capital market assumptions, we continue to predict that long-term equity and bond returns will not keep pace with the returns of the last 50+ years.
We recommend that sponsors develop their investment policy based on their specific risk and return objectives and time horizon, rather than tying investment policy to a specific long-term ROA to manage pension expense or the reported liability.

As part of their year-end reporting process, US corporate and public defined benefit (DB) plan sponsors must set an assumption for the long-term expected return on assets, or ROA. To help sponsors make more informed decisions, we provide this annual update on ROA assumptions, including our latest trend analysis and long-term capital market assumptions.

Corporate plans

Corporate sponsors use the ROA assumption to determine the pension expense recognized on their income statements. Under US accounting standards, the pension expense includes a credit (income) equal to the plan’s expected return on assets during the fiscal year.

The average ROA assumption reported by Russell 3000 companies at year-end 2022 was 5.2%, which was unchanged from the average in 2021 (Figure 1). This broke a nearly 15-year string of declining ROA assumptions. Still, the average ROA assumption is 270 bps lower than in 2006, when the introduction of mark-to-market balance sheet accounting for pension plans by the Financial Accounting Standards Board (FASB) and the passage of the Pension Protection Act by Congress first prompted many plan sponsors to reevaluate their investment strategies.

Figure 1

The distribution of ROA assumptions (Figure 2) sheds additional light on the long-term decline in the average assumption. In 2006, just over 10% of companies selected an ROA assumption below 7.0%. But by 2022, 90% of companies selected an ROA assumption below 7.0%, and the distribution of assumptions skewed more heavily downward than in the past.

Figure 2

Two dynamics have driven the long-term decline in the ROA assumption: higher fixed income allocations, which have increased more than 20% since 2006, and lower forward-looking return expectations, especially in fixed income given the long-term decline in interest rates. That said, fixed income allocations at year-end 2022 were about…

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Experts

Jacqueline Yang

, CFA

Investment Strategy Analyst

Ian Spencer

Investment Strategy Analyst

Amy Trainor

, FSA

LDI Team Chair and Multi-Asset Strategist

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