Largest DB Plans Lead in Accelerating Pension
By Rebecca Moore | PLANSPONSOR | March 1, 2018
According to Justin Owens,
director, Client Strategy & Research, Russell Investments,
while total 2017 contributions were the single largest ever
recorded, just as noteworthy was the contribution above
Following a pattern as
trendsetters, the 20 members of the $20 billion club collectively
dismissed funding relief and paid more than triple their mandated
contributions in 2017, according to Russell Investments.
Each corporation in the $20
billion club maintains global pension liabilities in excess of
$20 billion. These collective global liabilities represent
approximately 40% of all the defined benefit (DB) plan
liabilities held by U.S.-listed companies.
For the first time since 2013
(when rates rose and equity markets cooperated), funded status
meaningfully improved. This was despite discount rates (grouped
into “actuarial losses”) falling. In fact, for the first time
since 2009, actuarial gains/losses were not the leading driver in
funded status changes; net asset returns (asset returns in excess
of interest cost) were.
According to Justin Owens, CFA,
FSA, EA, director, client strategy and research at Russell, while
total 2017 contributions were the single largest ever recorded,
just as noteworthy was the contribution above requirements.
“Recently many sponsors have been content to contribute to their
DB plans only when they were required to. In contrast, they took
a proactive approach in 2017 by contributing discretionary
amounts in order to satisfy objectives beyond the
government-mandated minimum,” he says.
Between the years of 2009 and 2013
the total contributions hovered from about $25 to $30 billion.
Since Moving Ahead for Progress in the 21st Century Act (MAP-21)
- and its successors the Highway and Transportation Funding Act
of 2014 (HATFA) and the Bipartisan Budget Act of 2015 - was
passed, contributions have generally been much lower, bottoming
out at about $13 billion in 2015 when funding relief was in full
Tax reform and Pension Benefit
Guaranty Corporation (PBGC) premiums were the key contribution
motivators, according to Russell Investments. Funding
contributions with cash, company equity, and borrowing all took
place in 2017.
With tax reform finalized, several
members of the $20 billion club have announced massive
contributions for 2018, Russell notes. “We expect others in the
industry will take similar actions,” says Owens.
Accelerating DB contributions in
the future will still benefit plan sponsors.
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LIMRA Secure Retirement Institute: U.S. Single
Premium Pension Buy-out Sales Nearly Double in the Fourth
Consecutive Quarter LIMRA News Release | WINDSOR, Conn. | March 1, 2018
U.S. single premium pension
buy-out product sales were $11.1 billion in the fourth quarter of
2017, a 96 percent increase compared with fourth quarter 2016
results. This is first time that fourth quarter buy-out sales
have surpassed $10 billion in the last 5 years and the 11th
consecutive quarter of sales over $1 billion, according to LIMRA
Secure Retirement Institute’s quarterly U.S. Group Annuity
Risk transfer Survey.
In 2017, single premium buy-out
product sales were $23 billion, 68 percent higher than 2016.
“Following record sales in the
second and third quarters, single-premium buy-out sales marked
the second highest fourth quarter sales total on record since
2003,” noted Eugene Noble, research analyst, LIMRA Secure
Retirement Institute. “Total sales in 2017 reflected broad growth
in the industry with 11 in 15 companies reporting double-digit
growth in sales. With the exception of 2012 - when there were two
significant jumbo deals (>$1 billion) - annual sales have
never exceeded $23 billion since the Institute began tracking
sales of these products.”
Total assets of buy-out products
were over $114.3 billion in 2017, almost 16 percent higher than
prior year. Survey participants reported 29,517 contracts sold as
of Dec. 31, 2017.
“Institute research finds about 1
in 3 employer-sponsored pensions have a funding status of 80
percent or more. Facing increasing Pension Benefit Guarantee
Corporation premiums, more employers are exploring the option to
transfer their pension risk to an insurer,” said Noble. “As plans
approach full funding, they become attractive candidates for
pension risk transfers. The Institute expects funding ratios to
improve as interest rates increase, leading more and more plan
sponsors to consider buy-outs in the next few years.”
A group annuity risk transfer
product, such as a pension buy-out product, allows an employer to
transfer all or a portion of its pension liability to an insurer.
In doing so, an employer can remove the liability from its
balance sheet and reduce the volatility of the funded status.
Fifteen companies, representing
100 percent of the U.S. market, participated in this survey. A
breakout of pension buy-out sales by quarter since 2012 is
available in the LIMRA Data Bank.
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‘Making Progress’ on Missing Participant Guidance
By John Iekel | ASPPA |April 11,
The IRS and Treasury Department
are “making progress” on guidance regarding missing participants,
according to a panelist at an April 11 session of the Enrolled
Actuaries meeting held by the Conference of Consulting Actuaries
and the American Academy of Actuaries in Washington, DC.
Session moderator Tonya B.
Manning, the U.S. Retirement Leader and Chief Actuary for
Conduent HR Services’ U.S. Wealth Practice, noted that the IRS
and Treasury listed guidance on missing participants as one of their plans in
their 2017-18 Priority Guidance Plan. She asked the panelists - IRS
attorney Linda Marshall, IRS actuary Carolyn Zimmerman and
Treasury Department actuary Harlan Weaver - what that means.
“The missing participant issue is
big and complex,” remarked Weller. He said that as regulators,
one of the determinations they have to make is whether to wait to
answer questions until all issues are addressed, or issue smaller
pieces of guidance that are not comprehensive and
all-encompassing, but concern limited aspects of a matter. He
said he considers it “likely” that they will take the latter
approach regarding guidance on missing participants.
“We have work to do with our
colleagues at the Department of Labor,” he said, but added, “we
are making progress.”
Tax and Regulatory Reform
When an attendee raised the issue
of earlier proposals during the crafting of the Tax Cuts and Jobs
Act that called for new thresholds for and tax treatment of
401(k)s, Weller said that “the retirement system has a lot of
bipartisan support” and “there doesn’t seem to be much appetite
to use retirement plans as a funding source for other things.”
And when asked if President
Trump’s “two-for-one” executive order (mandating that for every
new regulation put in place, two must be eliminated) would affect
regulations governing pensions, Weller averred that such matters
are “way above my pay grade” but also observed that cost-benefit
analysis is different for tax regulations than for rules in other
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