Administration July 6, 2016

DB Plan Funded Ratios Down in June and Q2

Mercer finds a 3% decline for S&P 1500 companies and Wilshire finds a 1.8% decline for S&P 500 companies for June, and LGIMA finds a 3% quarterly decline for the typical DB plan.
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The aggregate funding level of defined benefit (DB) pension plans sponsored by S&P 1500 companies decreased by 3% to 76% as of June 30, according to Mercer.

Meanwhile, Wilshire Consulting reports the aggregate funded ratio for S&P 500 U.S. corporate pension plans decreased by 1.8 percentage points to end the month of June at 76.1%, the low point over the past 12 months and bringing its year-to-date decline to 5.3 percentage points.

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The firms attribute the monthly decline to turbulent markets and decreased discount rates following Brexit. As of June 30, the estimated aggregate deficit for S&P 1500 plans of $568 billion increased by $70 billion as compared to the end of May. Funded status is now down by $164 billion from the $404 billion deficit measured at the end of 2015, Mercer says.

Wilshire notes that the monthly change in S&P 500 corporate pension funding resulted from a 3.5 percentage point increase in liability values partially offset by a 1.1 percentage point increase in asset values. The year-to-date decrease in funding is the result of a 10.9 percentage point increase in liability values.

“Though non-U.S. stocks posted negative returns in June, assets were up overall as fixed income assets posted their largest monthly gain since January 2015,” says Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting. “The Wilshire 5000 Total Market Index gained 0.3 percentage points during the month recovering losses sustained after the British referendum vote to leave the European Union. Falling Treasury yields decreased the corporate bond yields used to value pension liabilities which led to a 3.5 percentage point increase in liability values of which over 2.5 percentage points occurred after the British referendum vote.”

NEXT: DB Funding Down for Q2 2016

Legal & General Investment Management America’s (LGIMA’s) Pension Fiscal Fitness Monitor, a quarterly estimate of the change in health of a typical U.S. corporate defined benefit pension plan, found pension funding ratios decreased over the second quarter of 2016. LGIMA estimates the average funding ratio declined from 78.8% to 75.6% over the quarter.

The Pension Fiscal Fitness Monitor showed funded ratios decreased over the quarter as pension liabilities grew more than assets. Global equity markets increased by 1.19% and the S&P 500 increased 2.46%. Plan discount rates fell 34 basis points, as Treasury rates decreased 32 basis points and credit spreads tightened 2 basis points. Overall liabilities for the average plan were up 6.0%, while plan assets with a traditional “60/40” asset allocation only increased 1.6%, resulting in a funding ratio decrease of 3.3%.

LGIMA’s Head of Solutions Strategy, Don Andrews, says: “Recent volatility in the equity and fixed income markets underscores the importance of establishing a comprehensive de-risking strategy. We continue to see significant interest from plans looking to mitigate funded ratio volatility via implementation of liability benchmarking, completion management, and option based hedging strategies, and would expect this demand to continue.”

The Pension Fiscal Fitness Monitor assumes a typical liability profile and 60% global equity/40% aggregate bond (“60/40”) investment strategy, and incorporates data from LGIMA research, Bank of America Merrill Lynch and Bloomberg.
Administration July 6, 2016

NAGDCA Supports Auto Enrollment for State DC Plans

A report notes that DC plans for public-sector employees are no longer just supplemental due to changes in state DB plans.

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Longer lifetime payouts, coupled with a volatile stock market that featured two major recessions in 10 years and a fixed income market that has been providing lower yields since 1980 have placed a tremendous amount of stress on the funding levels state and local defined benefit (DB) retirement systems, according to a report from the National Association of Government Defined Contribution Administrators (NAGDCA).

The report notes that many state and local governments have made significant changes to their DB plan designs and benefits. Public-sector defined contribution (DC) plans, once considered only supplemental, are now an important part of public employees’ retirement readiness.

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Due to their history of being viewed as supplemental, DC plans in the public sector have lagged behind their Employee Retirement Income Security Act (ERISA) counterparts in both innovation and participation. While participation in private-sector 401(k) plans has steadily increased with automation features, supplemental plans in the public sector have remained in the 30% to 50% participation range for decades. “[I]t is time for public-sector defined contribution plans to improve their plan design in an effort help public-sector employees achieve retirement readiness,” NAGDCA says in the report.

The report concedes that many states have anti-garnishment laws to prevent deductions from employees’ paychecks without their consent. However, 12 states have passed legislation to allow for auto-enrollment into public DC plans, and some public plan sponsors are in states that allow creative methods to circumvent anti-garnishment laws.

NAGDCA suggests by combining auto-enrollment with auto-escalation and increasing the initial default deferral rate, participants can significantly increase their savings over time. 

Case studies

The paper includes case studies. For example, the passage of H.B. 957 in Texas in 2007 authorized the automatic enrollment of newly hired state employees into the Texas Saver 401k plan. Beginning January 1, 2008, new hires and rehires with a break in service were auto enrolled at 1%. The participation rate pre-auto enrollment was 34%; in 2015 it was 56%. However, without auto-escalation of deferrals many participants remained at the 1% savings rate. The paper says with automatic deferral increases of 1% per year, capping at 6%, employees would have tripled their account balances.

In other case studies, NAGDCA found an auto-enrollment “stick rate” of more than 90%, even among employees that make less than $30,000 per year.

“Excuses for not beginning a savings program can be made at every phase in life—student debt, getting married, buying a house, having kids, paying for college, etc.—before you know it you are out of time. With so much burden of responsibility being placed on the individual today, it is imperative to change the system to better serve those that serve the public, by working to make auto-enrollment and auto-escalation programs available to all public sector employees,” NAGDCA concludes.

The report, “Using Auto-Enroll to Improve Participant Outcomes,” is here.

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