BCG's Steve Keating Shares his
Perspective in Bloomberg Article that Highlights the Stubbornness
of Pension Funding Deficits.
GE's
Gaping Pension Deficit is Just a Tiny Part of Companies' $269
Billion Gap
By Katherine Chiglinsky and Rick Clough| Bloomberg |
Oct. 9, 2019
GE pension benefits freeze may cut deficit up to $8
Billion.
General
Electric Co.’s gaping pension deficit certainly stands out for
its size. But the company is hardly the only one at risk of
potentially shortchanging some
of its employees come retirement.
All across corporate America, underfunded pensions
have become the norm. Even now, a decade after the financial
crisis, the largest plans face a shortfall of $269 billion, right
about where it was 10 years ago. Years of low interest rates have
largely offset gains in the stock market. Companies haven’t
helped matters by lavishing money
on shareholder
rewards and clinging to assumptions about returns that
proved to be too rosy.
The situation isn’t likely to improve any time soon,
particularly if interest rates keep falling. Even though a banner
year in both stocks and bonds lifted returns on the largest
pensions by 12% this year, their liabilities have grown even
faster, according to consulting firm Milliman. And while
GE’s move to
freeze benefits and set aside money will help trim its $22.4
billion pension shortfall by as much as $8 billion, Chief
Executive Officer Larry Culp said last month that low rates could
boost those same liabilities by roughly
$7 billion.
In other words, unless companies take even more
drastic steps, they’re currently doing little better than
treading water.
“Plan sponsors are getting concerned that we’ve had
a historic equity run in the market and they’re still sitting on
underfunded pension positions,” said Steve Keating, managing
director at BCG Pension Risk Consultants.
Part of it has to do with what’s called the discount
rate, which for corporate pensions typically corresponds to
yields on highly rated corporate bonds.
Simply put, the lower the discount rate, the less a
plan assumes it will earn over time. That means the plan needs to
set aside more money today to cover retirement benefits a company
has promised to pay its employees in the years and decades to
come. In August, the discount rate fell to an average of 2.95%,
the lowest level in the 19-year history of Milliman's pension
funding index.
Defined benefit plans, like your traditional corporate
pensions, have largely disappeared from view in the past couple
of decades as companies have embraced plans like 401(k)s.
Employers can opt to contribute to those plans, but it’s the
employees who are responsible for choosing the right investments
and are solely on the hook if those investments fare poorly. Click Here
for full article
U.S.
Weighs In on Supreme Court Consideration of Pension Case
By Rebecca Moore | planadviser
Both the U.S. Solicitor and the Pension Rights
Center argue that current funded status of a defined benefit (DB)
plan is not a proper measure for whether the participants have a
right to sue for breaches of fiduciary duties and prohibited
transactions under ERISA.
The U.S. Solicitor General and the Pension Rights
Center have filed briefs of Amicus Curiae with the Supreme Court
in Thole v. U.S. Bank, a
pension-focused case arising under the Employee
Retirement Income Security Act (ERISA).
Specifically, the Supreme Court will weigh the
following questions: Whether defined benefit (DB) plan
participants and beneficiaries may seek relief under 29 U.S.C.
1132(a)(3) when the plan is overfunded; whether defined benefit
plan participants and beneficiaries may seek relief under 29
U.S.C. 1132(a)(2) when the plan is overfunded; and whether
petitioners have demonstrated Article III standing.
Participants in the U.S. Bancorp Pension Plan filed
the lawsuit in 2013. In October 2017, the U.S. 8th Circuit Court
of Appeals upheld a lower court’s dismissal of the case based on
the fact that, despite some significant investment losses
suffered by the plan after investments in affiliated investment
funds, the court believed the plan had enough money left over to
keep paying benefits. Thus the participants could not prove, in
the court’s eyes, that they had the sufficient standing to move
ahead on fiduciary breach claims.
Both the U.S. Solicitor and the Pension Rights
Center argue that current funded status of a defined benefit (DB)
plan is not a proper measure for whether the participants have a
right to sue for breaches of fiduciary duties and prohibited
transactions under ERISA. Click Here
for full article.
