BCG Pension Insider
January 2020 - Volume 99, Edition 1
Insurance companies take on pension risk, so why wouldn’t DB plan sponsors take lessons from insurer’s investment strategies?
John Simone, managing director and head of Voya’s Insurance Investment Solutions business in Chicago, says old ideas for insurance companies are new ideas for defined benefit (DB) plans.
Just as DB plans are challenged by low interest rates and the late credit cycle, so are insurance companies; they have to meet long-term obligations too. And, as Brett Cornwell, fixed income client portfolio manager at Voya Investment Management in Atlanta, Georgia, points out, it is insurance companies that DB plan sponsors turn to when transferring the risk of their plans.
According to Cornwell, DB plans, in the last 10 or 15 years, have been adding more fixed income instruments that match the duration of their liabilities, such as long-duration bonds. They have also been moving out of growth-seeking assets. “DB plans are discounted with the AA corporate bond yield, so intuitively, plan sponsors are using more long-duration bonds to match the discount rate,” he says.
In these days of low interest rates, and following money market reform, investing strategies are needed to meet cash-flow needs from retiring baby Boomers and pension risk transfer actions.
WITH BABY BOOMERS RETIRING every day, defined benefit (DB) plan sponsors have more cash needs now.
Jeff Whitehead, head of client investment solutions at Aegon, based in Cedar Rapids, Iowa, believes if a DB plan isn’t already experiencing negative cash flow, it’s headed that way.
Peter Yi, director of short-duration fixed income and head of credit research at Northern Trust Asset Management (NTAM) in Chicago, says his firm is having conversations with DB plan sponsors about how they can be more thoughtful on optimizing cash holdings. “We are challenging our client to rethink cash and more effectively and efficiently use it. For the time being, DB plans are holding more liquidity and less risk assets,” he says.
Money market funds were at one time an effective cash preservation vehicle. NTAM believes the Securities and Exchange Commission (SEC) money market fund reforms requiring higher cash (or similarly liquid vehicle) ratios at daily and weekly intervals redefined “illiquid” securities, restricted lower quality securities in fund makeup and stricter maturity limits on fund components, resulting in their income levels becoming extremely modest.Rebecca Moore | PLANSPONSOR | December 10, 2019
Though down for the year, DB plan sponsors have seen upticks in funded status for three straight months, and sources make suggestions for continuing to hold on.
River and Mercantile notes that long-term corporate bond yields stayed relatively flat in November and U.S. stock prices moved higher. “With liability discount rates remaining level and an increase in U.S. equity markets, most [pension] plans should have seen a slight increase in funded status for the second month in a row,” the firm says in its Monthly Retirement Update for December.
It’s true that firms that track defined benefit (DB) plan funded status recorded a slight increase of about 1%. The aggregate funded ratio for U.S. corporate pension plans increased by one percentage point to end the month of November at 86.8%, according to Wilshire Consulting. Likewise, Mercer estimated the aggregate funding level of pension plans sponsored by S&P 1500 companies increased by one percentage point in November to 86%.
Mercer says this is the result of an increase in equity markets and a slight increase in discount rates. Ned McGuire, managing director and a member of the Investment Management & Research Group of Wilshire Consulting, notes, “November’s one percentage point increase in funded ratio is the third consecutive and seventh monthly increase this year.”
The PBGC has issued a final rule regarding pension plans undergoing distress or involuntary termination, and the OSFI has released a form for contribution schedule reporting.
The Pension Benefit Guaranty Corporation (PBGC) has published a final rule amending its regulation on Allocation of Assets in Single-Employer Plans by substituting a new table for determining expected retirement ages for participants in pension plans undergoing distress or involuntary termination with valuation dates falling in 2020.
The table is needed to compute the value of early retirement benefits and, thus, the total value of benefits under a plan. The rule is effective January 1, 2020.
The Office of the Superintendent of Financial Institutions (OSFI) issued a Schedule of Expected Pension Contributions Form. Section 9.1 of the Pension Benefits Standards Act, 1985(PBSA) requires a pension plan administrator and the fund trustee or custodian to notify the OSFI when expected contributions to a pension plan are not remitted on time. To enable fund trustees or custodians to fulfill their obligation to report late remittances, the PBSA requires a plan administrator to notify them of the amount and expected remittance date of future contributions. For this, the Schedule of Expected Pension Contributions Form may be used.
Standard Pension Closeout / Terminal Funding Case Rates
(No lump sums, disability or unusual provisions)
Retirees - 2.23%
Term Vesteds - 2.28%
Actives - 2.40%
Annuity Purchase Rates as of January 13, 2020