With stocks falling and discount rates falling, pension funding rates are also falling. In some cases, defined benefit plans are experiencing a 10-15% decline in their funding ratio year-over-year. Even though some reprieve with funding requirements is deferred for 2020, it is likely that most Plan Sponsors will face significant cost increases in 2021 and beyond. Now is the time for pension Plan Sponsors to review their funding policy, immunization strategy, investment allocation, and overall risk management approach.
Ideally, many Plan Sponsors have already incorporated an efficient immunization strategy prior to the recent market volatility as a result of Covid-19. Otherwise, they could be in for a surprise! A study conducted by MassMutual indicated that Plan Sponsors who are in a traditional 60/40 portfolio, most will likely see their funding status decline by as much as 15% with no other changes to their plan.
Willis Towers Watson examined pension plan data for 376 Fortune 1000 companies that sponsor U.S. defined benefit pension plans. Results indicate the aggregate pension funded status is estimated to be 79% as of March 31, 2020, compared with 87% at the end of 2019. That is the lowest funded status plans have experienced since 2012, when the yearend funded status stood at 77%. The reason for the difference is a high percentage of the plans in the Top 100 have implemented some form of an LDI (Liability Driven Investment) strategy.
There were two clauses that impact DB plans in the CARE Act:
- Plans can delay the payment of minimum required contributions due in 2020 to January 2021. You can delay the contribution, but you must accrue interest up to the payment in 2021.
- Plans can use their AFTAP, a plan funding calculation, for plan yearend prior to 2020 for determining if they have any restrictions on benefit payments in 2020, basically ignoring the market volatility of the 1st quarter for plan yearend calculations.
In the end, there is going to be a lot of plans that were perceived to be in a good position last year but are now regretting that they did not look to a more efficient portfolio immunization strategy to stabilize their plan funding ratio sooner. The key is to not get discouraged; you can work through this issue, but a proactive immunization plan needs to be implemented now so this does not happen again in the future. The first step in that plan is formulating the appropriate asset allocation and subsequent glidepath to meet the liability objectives rather than focusing on the concern for whether an immunization strategy should have been previously implemented. If your current allocation is using pooled fixed-income products, then there is no time like the present to begin exploring an efficient immunization strategy.
Advanced Capital Group has been consulting on Defined Benefit and Defined Contribution plans for over 20 years. We can help Plan Sponsors implement an efficient immunization strategy for the future. Contact us at www.acgbiz.com