COVID-19 Having Major Impact on Pensions

“The Impact of COVID-19 on Retirement Plans,” a webinar hosted by the American Academy of Actuaries Pension Practice Council, explored how the coronavirus pandemic has affected various types of pension plans.

Linda Stone, senior pension fellow, American Academy of Actuaries, said, “Equity markets have recovered following a significant downturn during the first quarter of 2020. Year-to-date through November 30, U.S. equities have returned 15%. However, that has been offset by interest rates falling to historic lows. As a result, long-term corporate bond yields are down 70 basis points [bps] year-to-date through November 30.”

That aside, Stone said that “interest rate and asset smoothing mechanisms mitigate much of the effect of recent volatility on 2021 funding calculations. Recognition of asset gains or losses will be delayed for plans using asset smoothing, while stabilized interest rates used by single employer plans may fall less than market rates.”

Stone also said that the impact COVID-19 has on plans will vary widely across geographies, industries, plans and participants. She also noted that layoffs and furloughs have accelerated retirement and that the impact this has on plans will depend on whether the plan offers any early retirement subsidies.

Eric Keener, chairperson of the Retirement System Assessment and Policy Committee at the American Academy of Actuaries, noted that single employer pensions offered by companies in the S&P 500 had a funded status of 87% at the beginning of the year. At the height of the market volatility in March and February, that slipped to 80%, but the funded status has since risen to 89.3%.

“Sponsors of single employer plans likely need to consider the impact of the pandemic in preparing 2020 year-end disclosures and 2021 expenses,” Keener said. “While mortality may seem like the area where adjustments are most needed, turnover, retirement salary increases, lump-sum elections and other factors may be more material.”

Keener said that even though more than 300,000 people have died from COVID-19 in the United States, this increased mortality is unlikely to have a significant impact on benefit obligations for most pension plans. As to whether it might in the future, it depends on how quickly the nation can overcome the pandemic, Keener said.

To reflect their experience in 2020, single employer pension plans need to adjust data for impacted groups, i.e., those who have been terminated from the plan or who have retired, Keener said. They also need to estimate the impact from these factors on this year and reflect them as an adjustment to roll-forward assumptions, he said.

Citing Aon’s September “COVID-19 Employer Pulse Survey,” Keener noted that about one-third of employers have taken workforce actions in response to the pandemic. Thirty-one percent had either downsized their workforce via layoffs or were considering doing do, and 33% were implementing or considering long-term restructuring of their operations and workforce. Thirty-one percent had canceled or deferred base salary adjustments or merit increases, or were considering doing so.

So, while employers have made rather drastic changes to their workforce, Keener said, changes to their retirement plan have been more muted. Only 9% had either temporarily suspended or reduced employer contributions to defined contribution (DC) plans.

However, single employer defined benefit (DB) funding relief is under considerable strain, Keener said. “Some businesses are facing challenges that make it more difficult to manage pension contributions, even if such contributions were anticipated prior to the pandemic,” Keener said. “But the impact varies widely by company and industry.”

Christian Benjaminson, chairperson, Multiemployer Plans Committee at the American Academy of Actuaries, said the full impact of COVID-19 mortality on multiemployer plans is not yet known. “It will likely depend on the industry, geographical location of the plan and where retirees live,” Benjaminson said.

Like single employer pension plans, multiemployer pensions have seen a spike in retirements in some industries, with some participants choosing to retire if they are laid off, Benjaminson said. “Increased retirement is generally a loss to the plan,” he said.

Plan funding will depend on the industry. Among all industries, 63% of multiemployer plans are in the green zone. But 53% of manufacturing plans are either in the critical or declining zone. Forty-eight percent of retail/food plans are in in that state, and this is true for 39% of transportation industry plans.

“Multiemployer plan funding will depend on hours and plan contributions,” he said. A big question is “will hours return fully to pre-COVID levels or will there only be partial improvement? Will there be an increase in bankruptcies? Will the pandemic affect future bargaining by putting pressure on health and welfare costs?”

Benjaminson noted that the Pension Benefit Guaranty Corporation (PBGC)’s fiscal year 2020 report shows the insolvency of the multiemployer program occurring in fiscal year 2026. PBGC says COVID-19 has not accelerated that insolvency.

However, Benjaminson says he believes that “COVID-19 is likely to accelerate the insolvency of already troubled plans and push more plans into critical and declining status. Even healthy plans will need extended time to recover from the market and demographic losses. The need for pension reform remains high for both PBGC and plans.”

Addressing public plans, Todd Tauzer, chairperson of the Public Plans Committee at the academy, said the estimated average funded status of public plans is around 71%. Most of these plans have June 30 fiscal years. “They experienced the full downturn as well as partial recovery,” Tauzer said. “Fiscal year median plan returns were up around 3.2%. Longer-term impact remains to be seen, but economic volatility is anticipated.”

Plans that have medical workers and first responders could experience some COVID-19 mortality, Tauzer said.

Like the other types of pension plans, public plans are seeing increased voluntary terminations and retirement, directly and indirectly related to COVID-19, Tauzer said. “This directly impacts contributions coming into plans. There are broad, sweeping revenue declines anticipated for state and local governments, resulting in economic disruption. Those revenue declines have created heightened competition among expenditures, including pension contributions. Some plans have eliminated supplemental pension contributions, postponed anticipated contribution increases or taken out loans.”