Administration March 4, 2015

Financial Wellness Programs Should Address Key Risks

Employer financial wellness programs may include education about budgeting and paying down debt, but they should also help employees protect themselves against some key financial risks.
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Most employees are unprepared to fully cover key financial risks they face during their working careers, The Prudential Insurance Company of America has found.

Prudential says much attention has been given to the financial risk of outliving one’s assets in retirement, but many employees underestimate three more immediate risks—loss of family income due to a premature death, loss of income due to illness or injury, and out-of-pocket health care and other expenses—which could cripple their financial outlook. Employees that are not adequately protected against these risks may need to start paying their day-to-day expenses by incurring credit card debt, using lines of credit, or taking loans from their employer-sponsored retirement plans, the company contends.

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Prudential, with supporting research and analysis provided by Ernst & Young, developed a new “Prutection Score” metric to help employers evaluate the financial wellness needs of their employee populations. For each risk, the Prutection Score gauges how financially prepared employees are should a risk event occur by looking at the resources available to them, such as personal funds and insurance coverage, relative to the resources needed.

In developing the Prutection Score, Prudential conducted a financial wellness survey of more than 5,000 employees who had medical insurance. Drawing on data from that survey, as well as various government and industry sources, Prudential developed national benchmark scores.

The benchmark Prutection Scores indicate:

  • In the event of loss of income due to premature death, the average employee would be able to cover 71% of ongoing financial needs for a spouse’s or partner’s lifetime and for children until adulthood.
  • In the event of loss of income due to illness or injury, the average employee’s household would be able to pay 71% of their monthly expenses using other income sources, such as spousal or partner income and disability insurance benefits.
  • Faced with out-of-pocket medical and non-medical expenses due to a critical illness or accident, the average employee’s household is equipped to cover just 48% of those expenses through liquid savings and insurance coverage.

While about one-third of employees in the wellness survey score high—90 or higher—in each risk category, only 4% score above 90 for all three risks, and only 2% have scores of 100 or more for all three. Prudential also found that for each risk category, Prutection Scores vary dramatically from one demographic group to another.

“These findings suggest that employers have a real opportunity to help improve their employees’ financial health through targeted, needs-based financial wellness programs, which educate employees about the financial risks they face and provide the tools they need to help manage them,” Prudential says in a white paper called “Financial Wellness: The Next Frontier in Wellness Programs.”   

Prudential surveyed 5,335 individuals between March 5 and April 2, 2014, using Harris Online Panel.

Administration March 4, 2015

State-Sponsored Pensions Reach 80% Funded Status

Wilshire Consulting also reported that corporate pensions reached a 77.2% funding ratio in February.
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The ratio of pension assets to liabilities, or funding ratio, for 131 state-sponsored defined benefit retirement systems was 80% in 2014, up from 74% in 2013, according to a report issued by Wilshire Consulting.

The “Wilshire 2015 Report on State Retirement Systems: Funding Levels and Asset Allocation” is based on data gathered by Wilshire Consulting from the most recent financial and actuarial reports provided by 131 retirement systems sponsored by the 50 states and the District of Columbia. Of the 131 systems studied, 92 systems reported actuarial values on or after June 30, 2014, and the remaining 39 systems last reported prior to June 30, 2014.

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Of the 92 state retirement systems that reported actuarial data for 2014, 87% have market value of assets less than pension liabilities, or are underfunded. The average underfunded plan has a ratio of assets-to-liabilities equal to 73%. Those same plans reported pension assets and liabilities of $2,046.5 billion and $2,672.0 billion, respectively. The funding ratio for these 92 state pension plans was 77% in 2014, up from 70% for the same plans in 2013. These plans saw their pension assets grow by 13.7%, or $247.0 billion, from $1,799.5 billion in 2013 to $2,046.5 billion in 2014. At the same time, liabilities grew 4.7%, or $118.8 billion, from $2,553.2 billion in 2013 to $2,672.0 billion in 2014. Their aggregate shortfall, or net pension liability, decreased $128.2 billion over fiscal 2014, from $753.7 billion to $625.6 billion.

For the 131 state retirement systems that reported actuarial data for 2013, pension assets and liabilities in that year were $2,726.8 billion and $3,704.5 billion, respectively. Of these 131 state retirement systems, 93% were underfunded. The average underfunded plan in fiscal year 2013 had an assets-to-liabilities ratio equal to 71%.

“Global stock markets rallied strongly over the twelve months ended June 30, 2014, augmenting the positive performance of global fixed income and allowing pension asset growth to outdistance the growth in pension liabilities over fiscal 2014,” says Russ Walker, vice president and a member of the investment research group of Wilshire Consulting. “State pension portfolios have, on average, a 66.1% allocation to equities—including real estate and private equity—and a 33.9% allocation to fixed income and other non-equity assets. The 66.1% equity allocation is somewhat lower than the 67% equity allocation in 2004. Perhaps the most notable trend over the ten-year period has been the rotation out of U.S. equities into other growth assets such as non-U.S. equities, real estate and private equity.”

Wilshire forecasts a long-term median plan return equal to 5.99% per annum, which is 1.66 percentage points below the median actuarial interest rate assumption of 7.65%. It is important to note that Wilshire’s assumptions range over a conservative 10-year time horizon, while pension plan interest rate assumptions typically project over 20 to 30 years.

Wilshire Consulting also reported that the aggregate funded ratio for U.S. corporate pension plans increased to 77.2% for the month of February. “We estimate that overall the funded ratio for the sample plan increased by 3.9% from 73.3% to 77.2% in February. This increase was driven by the decrease in liability value of 3.5% versus the 1.7% increase in asset value. The asset result is due to positive returns for equities, while the liability value decreased due to rising corporate bond yields,” says Ned McGuire, vice president and member of the pension risk solutions group of Wilshire Consulting.

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