Breaking
Free From Interest Rate Bind on DB Funding
By Lee Barney | PLANSPONSOR |October 17, 2019
The long-running low interest rate environment has
created DB plan funding challenges, but plan sponsors can take
steps to mitigate them.
Defined benefit (DB) plans are facing funding
challenges, but there are actions that they can take to mitigate
them.
The main problem is that the equity markets have
been volatile and interest rates declined sharply in the late
summer, says Gordon Young, senior director, retirement, at Willis
Towers Watson in Milwaukee. Through the end of July, interest
rates for both Treasury and high-quality corporate bond yields
decreased to their lowest levels since the global financial
crisis of 2008, Young notes. Then, in August, the 30-year
Treasury yield dropped below 2% and the Merrill Lynch AA-AAA 10+
index dropped below 3% - both historically low levels.
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Increase
in Interest Rates Gives DB Plans a Boost in September
By Rebecca
Moore|
PLANSPONSOR |October 9, 2019
Jessica Hart, with Northern Trust Asset Management,
notes, “Even though the Fed cut rates by 25 bps, the average
liability discount rate climbed by 13 bps. This highlights the
reality that for pension plans, movement at the long end of the
yield curve is more impactful than the headline Fed rate.”
The average funded ratio of corporate defined
benefit (DB) plans improved in September from 82.5% to 84%,
according to Northern Trust Asset Management (NTAM). Both
positive returns in the equity market along with lower
liabilities led to higher funded ratio.
NTAM says global equity market returns were up approximately
2.1% during the month. The average discount rate increased from
2.56% to 2.69% during the month.
Jessica Hart, head of OCIO Retirement Practice,
notes, “Even though the Fed cut rates by 25 bps, the average
liability discount rate climbed by 13 bps. This highlights the
reality that for pension plans, movement at the long end of the
yield curve is more impactful than the headline Fed rate.”
According to River and Mercantile’s monthly
Retirement Update, long term interest rates saw
some of the steepest rises in recent memory in early September,
with the 10 year U.S. Treasury yield rising approximately 30 bps
in a few days. This increase was not fully sustained for the rest
of the month but discount rates did remain higher compared to
their multi-year lows achieved in August.
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DB Plan
Sponsors Focused on Cost and Funded Status Concerns
By Rebecca
Moore|
PLANSPONSOR |November 13, 2019
They are lengthening bond durations and increasing
liability-hedging fixed income allocations, a Vanguard survey
found.
Since 2010, the S&P 500 increased by over 200%
but barely kept pace with defined benefit (DB) plan liability
growth due to discount rates falling more than 250 basis points
and longer life spans as reflected in a new mortality table,
Vanguard notes in a report about its 2019 survey of pension sponsors.
It points out that pension plan sponsors also faced
three revisions to the funding regulations introduced by the
Pension Protection Act of 2006 (PPA), a quadrupling of Pension Benefit Guaranty
Corporation (PBGC) premiums, and the growth of the pension risk-transfer
business from approximately $1 billion per year to $25 billion
per year. “These changes have caused plan sponsors to rethink the
way they operate their pension plans, especially in the areas of
plan design, asset allocation, investment policy, risk management
and fiduciary partnerships, Vanguard says.
About one-third of plans are open and active (33%),
frozen with no future benefit accruals (34%) and closed to new
entrants (32%). Compared with 2010, significantly more pension
plans are closed to new entrants and frozen to future benefit
accruals in 2019, Vanguard found. However, the percentage of
closed and frozen plans in 2019 is similar to that of 2015. The
firm says this leveling off of the closing and freezing of
pension plans shows that those plans that remained open and
active following the global financial crisis, through the
introduction of the more stringent funding and marked-to-market
reporting requirements, and despite the increases in PBGC
premiums are more likely to be dedicated to keeping that plan
open in the future.
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Number of
Plans Passing Off Liabilities Expected to Rise
By Rob
Kozlowski |
Pensions&Investments |October 27, 2019
U.S. corporate pension plans are showing an
increasing interest in plan terminations as the pension risk
transfer market remains steady.
The number of pension risk transfer deals, including
those involving full plan terminations, is expected to rise this
year, sources said.
Even so, U.S. corporate pension plans are expected
to transfer a total of about $25 billion in liabilities to
insurance companies in 2019, consistent with last year.
The total for 2018 was about $27 billion, according
to the annual LIMRA Secure Retirement Institute survey. Despite
the similar dollar amounts, the number of deals will likely
increase significantly, said Matt McDaniel, Philadelphia-based
U.S. leader of Mercer LLC's financial strategy group, in a telephone
interview.
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