Investing May 10, 2019

State and Local Pension Investments Have Become Riskier

This may expose participating governments to higher funding risks, FitchRatings says.

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Over the past two economic cycles, state and local pension asset allocations have become riskier, raising their potential volatility and exposing participating governments to higher funding risks, according to FitchRatings.

Between 2001 and 2017, average allocations to higher-risk equities and alternatives increase from 67% to 77%, while lower-risk allocations declined form 33% to 23%.

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The shift away from lower-risk to higher-risk allocations has not necessarily produced higher returns. The state and local governments in this survey saw average returns of 6.2% between 2008 and 2017 and 6.4% between 2001 and 2017. The lower returns were due to the Great Recession of 2008, the unsteady economic recovery that began in 2009 and the low interest rates in that period of time, FitchRatings says. Using weighted averages to aggregate data across each state’s major pension systems, actual returns by state fell short of the expected targets for all states between 2001 and 2017, with the exception of South Dakota.

Unfunded pension liabilities steadily increased to $1.2 trillion (74% funding) at the end of 2017 from $33 billion (98% funding) in 2001. FitchRatings attributes this to lower than expected returns, shortfalls in contributions and increases in projected future benefits.

FitchRating’s findings are based on data provided by Boston College’s Center for Retirement Research and includes data on 180 state and local systems in all 50 states, which the research firm believes account for 95% of the total state and local pensions by assets and plan participants.

Compliance May 10, 2019

PBGC Proposes New Coverage Determination Forms

Plan sponsors may submit a determination of coverage request for four common types of DB plans.

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The Pension Benefit Guaranty Corporation (PBGC) is requesting that the Office of Management and Budget (OMB) approve, under the Paperwork Reduction Act, a collection of information necessary for the PBGC to determine whether a defined benefit (DB) plan is covered under Title IV of the Employee Retirement Income Security Act (ERISA).

This is the second request by the agency and follows a period of comments on its first request this past December.

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A proposed form and instructions would be used by a plan sponsor or plan administrator to request a coverage determination and would be suitable for all types of requests. The proposed form would highlight the four plan types for which coverage determinations are most frequently requested:

  • Church plans as listed in Section 4021(b)(3) of ERISA;
  • Plans that are established and maintained exclusively for the benefit of plan sponsors’ substantial owners as listed in Section 4021(b)(9);
  • Plans established and maintained by professional services employers, as listed in Section 4021(b)(13) that, since September 2, 1974, have covered no more than 25 active participants; and
  • Puerto Rico-based plans within the meaning of Section 1022(i)(1) of ERISA.

A number of DB plans that have been determined to qualify for church-plan status by the IRS have had that status challenged in lawsuits. But, the PGGC tells PLANSPONSOR, its latest request has no tie to the lawsuits, and “the purpose of the coverage form is to ease the process by which people can make a request for a coverage determination.”

A supporting statement addressing public comments on the new proposed forms and instructions discusses a comment asking that employers be allowed to request coverage determinations before creating and sponsoring pension plans. Although the agency cannot provide coverage determinations for plans that do not exist, the supporting statement explains that, in limited situations, employers will be able to use the soon-to-be issued coverage forms to request an opinion letter about whether a plan being developed is likely to receive PBGC coverage.

Comments are due to OMB by June 7.

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