Pension Funded Status Sees Decline for June and Q2 2017

Still, funded status is up for the year, according to one firm’s estimates.

The aggregate funded ratio for U.S. corporate pension plans decreased by 0.4 percentage points to end the month of June at 83.1%, according to Wilshire Consulting, the institutional investment advisory and outsourced-CIO business unit of Wilshire Associates Incorporated.

The monthly change in funding resulted from a 0.7% increase in liability values, which was partially offset by a 0.2% increase in asset values. “June marked the third consecutive month of small declines in funded ratios after seven consecutive months of rising or flat funded ratios,” says Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting. “June’s decrease was driven by the increase in liability values resulting from a 5 basis points fall in the corporate bond yields used to value pension liabilities. Slight positive returns for most asset classes helped to partially offset the rise in liability values.”

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Mercer reports the estimated aggregate funding level of pension plans sponsored by S&P 1500 companies decreased by 1% to 82% in June, with a decrease in discount rates partially offset by mixed equity markets. As of June 30, the estimated aggregate deficit of $416 billion represents an increase of $25 billion as compared to the deficit measured at the end of May.

The S&P 500 index gained 0.5% and the MSCI EAFE index lost 0.4% in June. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 4 basis points to 3.78%.

“Another Fed rate hike resulted again in a downward tick in pension discount rates,” says Matt McDaniel, a partner in Mercer’s US Wealth business. “It is yet another reminder that the long duration rates used for pension liabilities are much more sensitive to supply and demand factors than to short-term Fed policy decisions. This means that the future rate increases planned by the Fed probably won’t directly translate to improved pension funded status. Sponsors need a strategy to deal with a potentially flattening yield curve – those holding fixed income investments in a traditional aggregate strategy may find themselves hit the hardest as rates increase.”

October Three’s model Plan A, a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, lost close to 1% in June, while its model Plan B, a cash balance plan (duration 9 at 5.5%) with a 20/80 allocation and a greater emphasis on corporate and long-duration bonds, lost a fraction last month.

NEXT: Quarterly and year-to-date funded status results

However, October Three notes that both model plans it tracks have enjoyed modest improvement overall in the first half of 2017. The funded status for Plan A is up 7% for the year, while the funded status for Plan B is now almost 5% ahead during 2017.

Legal & General Investment Management America (LGIMA)’s Pension Fiscal Fitness Monitor, a quarterly estimate of the change in health of a typical U.S. corporate defined benefit (DB) pension plan, indicates funding ratios fell over the second quarter of 2017. LGIMA estimates the average funding ratio fell from 83.9% to 82.8% over the quarter.

The Pension Fiscal Fitness Monitor showed pension assets grew less than pension liabilities. Global equity markets increased by 4.45% and the S&P 500 increased 3.09%. Plan discount rates fell 23 basis points, as Treasury rates decreased by 15 basis points and credit spreads tightened by 8 basis points. Overall liabilities for the average plan rose 4.55%, while plan assets with a traditional “60/40” asset allocation increased 3.24%, resulting in a funding ratio decrease of 1.05%.

LGIMA’s Head of Solutions Strategy, Don Andrews, says: “We estimate that funded ratio levels for the typical plan with a traditional asset allocation decreased primarily due to assets failing to keep pace with pension liabilities. While equity markets rallied, lower interest rates and tighter credit spreads resulted in an even stronger quarter for liability values, which contributed negatively to the funded ratio.”

He adds, “We are seeing continued interest from many plan sponsors looking to manage funding ratio outcomes and minimize volatility. In particular, plan sponsors are considering customized [liability-driven investment] strategies such as liability benchmarking, completion management, and option-based hedging strategies.”

The Pension Fiscal Fitness Monitor assumes a typical liability profile and 60% global equity/40% aggregate bond investment strategy, and incorporates data from LGIMA research, Bank of America Merrill Lynch and Bloomberg.

Tax-Advantaged Relief and Retirement Savings: HSAs Shape the Way for the Millennial Generation

Jamie Janvier, with ConnectYourCare, discusses how to get Millennials to understand the value of health savings accounts and other tax-advantaged savings.

Critics have long argued that health savings accounts (HSAs) are designed with the wealthy in mind—those whose incomes allow pre-tax contributions to build up year over year—but the latest research is proving otherwise. HSAs are undeniably being recognized as a tax-advantaged way for the Millennial generation to save for health care costs not only in the moment, but in retirement.

Before discussing the HSA, let’s first understand the audience and its journey. Those that make up the Millennial generation, including the younger population born between the 1990s and the mid-2000s known as Generation Z, are predicted to be working into their 70s, mainly due to financial uncertainties spurred by historically high student loan debt, shrinking median income and the soaring costs of home ownership. As a result, this largest living generation—having recently overtaken Baby Boomers to earn this distinction, according to U.S. Census data—is inevitably getting by, paycheck to paycheck, and stashing less away in savings. What savings these young workers do accrue is likely kept in cash value, vs. informed investment opportunities.

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But this is not to say that Millennials do not spend beyond practical means; despite financial struggles, Millennials tend to spend on luxuries they come to trust—items they believe in. Having been born into innovation, they find the latest tech gadgets, for example, important to them, as well as items pertinent to their health, such as gym memberships, fitness trackers, and nutritional foods and supplements.

So, if health is indeed worth the extra spend, is health care up there as a trusted necessity? Not exactly.

Numerous studies have indicated that health insurance and medical care do not make the cut as one of Millennials’ top priorities. Specifically, more than one-third of the generation ranks physical health as its absolute top priority, while less than one in 10 consider obtaining affordable health insurance and access to quality health care as their items of highest importance. Also evident is the absence of routine doctor visits for Millennials, counter to generations preceding them who place a high value on customary physicals and the doctor-patient relationship.

NEXT: Hope … in the form of an HSA

Whether Millennials have a general distrust in modern health care, or apprehension over the cost of high premiums or deductibles, opportunities abound for employers to educate and empower these younger workers when it comes to health benefits and tax-advantaged plan offerings that yield significant cost savings potential—for the here and now, and in preparation for retirement. The time is ripe for the Millennial generation to understand the ins and outs of an HSA, particularly the underutilized savings opportunities that carry sky-high potential for storing away tax-advantaged, interest-bearing funds for the future.

Contributions to an HSA reduce taxable income, and the interest earned on HSA balances and investments is tax free. The result is triple tax savings: Contributions, interest from investments, and ongoing and future qualified distributions can all be tax exempt under normal circumstances. Because an HSA enables individuals, and families, to set pre-tax dollars aside—along with any employer contributions—the funds help to offset high deductibles. Further, the account is portable, meaning that it belongs to the employee and goes with him wherever he goes, should he change employers. And, unlike a flexible spending account (FSA), there are no “use it or lose” policies at the end of a plan year; funds roll over, year after year.

Drawing many favorable comparisons to the traditional 401(k), the HSA is now widely recognized as a true, tax-advantaged way to save for health care costs in retirement. By future-proofing funds in an HSA, young employees in their 20s could, theoretically, start making careful investments and save enough to meet their retirement needs by age 60 for both lifestyle and health-care expense coverage.

For example, if a 25-year-old employee contributes $3,000 a year to his HSA each year until retirement, uses $1,500 a year for medical expenses, earns 6% a year in interest and investments, and reinvests all earnings, the value of the HSA could be about $246,000 by the time he turns 65. This estimate does not include potential contributions from the employer—an increasingly popular option, as the money employers save by driving enrollment into lower-cost high-deductible health plans (HDHPs) can be apportioned to help jump-start employees’ HSAs early in the plan year.  

NEXT: Stacking up the savings

Beyond the HSA, other types of accounts can have tax advantages that can really add up if Millennials maximize every benefit opportunity available to them. Realization of such savings is all about understanding the near- and long-term financial benefits of tax-advantaged accounts, and how they stack up and complement each other on an annual basis. ConnectYourCare recently shed light on these scenarios when it conducted a modeled analysis called the Health Care Stack, which illustrates the pre-tax dollars consumers can contribute for both health and lifestyle expenses, ahead of retirement.

The pre-tax savings are vast when notional accounts are factored into the equation. With approved Internal Revenue Service (IRS) limits of a $2,600 per year maximum for FSAs, $5,000 per year maximum for dependent care FSAs, and $6,120 per year maximum for commuter/parking reimbursement plans, this currently equals $38,470 of pre-tax contributions that younger consumers could save by offsetting the tax burden and then invest toward retirement.

The road to retirement, paved with pre-tax savings  

While a one-size-fits-all savings strategy has ceased to exist, it is fundamentally important for Millennials to gain awareness of their options and subsequently understand how the HSA and other pre-tax accounts play an important role in shaping future retirement planning. It’s never too early to plan out a retirement savings strategy. And, as earnings increase over time, so can contribution levels and investments, creating a financial cushion to cover individual and family medical expenses—and to enjoy life comfortably.

Jamie Janvier is the program marketing manager at ConnectYourCare, a provider of consumer-directed health care account solutions. For more information, please visit www.connectyourcare.com, email the author at Jamie.janvier@connectyourcare.com, or follow the company on Twitter @ConnectYourCare.  

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Statements by the authors do not necessarily reflect the stance of Strategic Insight or its affiliates.

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