Administration December 7, 2016

Trump Election a Positive So Far for DB Funded Status

Consultants estimate an improvement in funded ratios for defined benefit plans in November, and all attribute it to market activity following the election.
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The month of November has positively affected defined benefit (DB) plan funding ratios given the dramatic sell-off in rates, tighter credit spreads, and a rally in U.S. equities since the election results, according to Legal & General Investment Management America (LGIMA).

LGIMA estimates that pension funding ratios increased 3.4% since the end of October. Global equity markets increased by 0.8%. LGIMA estimates plan discount rates rose 37 basis points, as Treasury rates rose 47 basis points while credit spreads tightened 10 basis points. Overall, liabilities for the average plan were down 4.6%, while plan assets with a traditional “60/40” asset allocation decreased by 0.5%. Plans with equity allocation to the S&P 500 saw their funding ratios increase by approximately 4.8%.

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Mercer also found the estimated aggregate funding deficit of pension plans sponsored by S&P 1500 companies reduced by 20% during the month of November. This brought current funded status to 81% at the end of November, as an increase in discount rates was mildly offset by mixed equity markets.

As of November 30, the estimated aggregate deficit of $414 billion represents a decrease of $116 billion as compared to the end of October. However, the aggregate deficit is still up $10 billion from the $404 billion deficit measured at the end of 2015, according to Mercer.

The S&P 500 index gained 3.4% and the MSCI EAFE index lost 2.2% in November. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by 45 basis points to 4.11%.

“The surprising election win by Donald Trump appears to have started the long awaited increase in long term interest rates which has greatly increased the funded status of pension plans,” says Jim Ritchie, partner, Mercer’s Retirement business. “Donald Trump’s promises of lower taxes and higher infrastructure spending are being credited for the recent increase in long term rates, which are up approximately 40 basis points since the election. Plan sponsors should take a serious look at their de-risking strategies with the focus on whether this rise in rates is temporary or a long term trend. Either way, plan sponsors will want to have a solid strategy in place to take advantage of these higher rates.”

According to Wilshire Consulting, the aggregate funded ratio for U.S. corporate pension plans increased by 3.3 percentage points to end the month of November at 80.6%, nearly eliminating its year-to-date decline to 0.8 percentage points.

The monthly change in funding resulted from a 5.2% drop in liability values significantly offsetting the 1.2% decrease in asset values. This narrowed the year-to-date decline in funding ratios, which has been driven by a nearly 6% increase in liability values. 

Wilshire also pointed to the post-election stock and bond market activity as boosting pension funding.

Meanwhile, both model pension plans tracked by October Three enjoyed strong improvements in funded status during November—Plan A improved by 5% and Plan B by more than 1% last month—pushing both plans into positive territory for the year, up almost 1%.
Data and Research December 7, 2016

Living Longer Poses Retirement Challenge for Women

A study finds women face higher health care costs in retirement than men, with fewer resources.
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Health care costs could take a bite out of anyone’s retirement income, but assuming average longevity for women and men, women need to plan for much higher retirement health care expenses than men, according to a report from HealthView Services, a provider of retirement health care cost data and planning tools to the retirement industry.

The average expected future retirement health care premiums for Medicare B, D and supplemental insurance for a healthy woman retiring this year at 65-years-of-age and living to 89 are projected to be $235,526 ($153,079 in today’s dollars), significantly more than the $199,946 ($135,321) for men, who are expected to live to 87, the company’s projections found. Adding in all out-of-pocket costs, hearing, vision and dental, women’s total lifetime health care costs rise to $314,673 ($205,468), compared to $267,395 ($181,625) for men. These numbers assume Modified Adjusted Gross Income (MAGI) in retirement will not trigger Medicare Surcharges (Less than $85,000 or $170,000 for a couple).  

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Among the unique challenges facing women are lower lifetime earnings resulting from gender pay disparities and time out of the workforce to take care of family members. These two variables inevitably impact retirement savings and Social Security income. 

According to “The High Cost of Living Longer: Women & Retirement Health Care,” on average, husbands live two years fewer and are 2.3 years older than their wives. This suggests women will spend approximately four years at the end of life on their own. 

NEXT: How much savings will women need?

For a healthy 55-year-old-woman living to 89, total health care costs between 85 and 89 are projected to be $146,471 ($75,200 present value), excluding long-term care. For women who will live longer, the costs will be even higher.

Meeting long-term care needs will be an additional challenge. The report uses a blended approach that reflects the probability of care to calculate reasonable savings to cover this potential expense. For a 55-year-old woman retiring at 66, the savings recommended to plan for end-of-life care are estimated to be $372,631 ($194,215 present value).  

The paper explores savings required to meet end of life needs. It shows that a 55-year-old woman can allocate $25,500 growing at 6% annually to cover her projected $146,471 total health care costs in the final four years of life. Alternatively, she could address $72,932 in basic Medicare premiums (Parts B and D) by investing $12,700 today at an estimated 6% annual return or increase 401(k), or health savings account (HAS) contributions by approximately $25.00 per pay period (assuming 26 pay periods) based on an employer match.

"While the challenges facing women should not be underestimated, with careful planning and preparation, financial security in retirement is an achievable goal for many," says Ron Mastrogiovanni, founder and CEO of HealthView Services. "It is our intention for the data in this report to serve as a starting point for discussions leading to plans that reflect the future needs of women in retirement."

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