Investing November 13, 2019

DB Plan Sponsors Focused on Cost and Funded Status Concerns

They are lengthening bond durations and increasing liability-hedging fixed income allocations, a Vanguard survey found.

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Since 2010, the S&P 500 increased by over 200% but barely kept pace with defined benefit (DB) plan liability growth due to discount rates falling more than 250 basis points and longer life spans as reflected in a new mortality table, Vanguard notes in a report about its 2019 survey of pension sponsors.

It points out that pension plan sponsors also faced three revisions to the funding regulations introduced by the Pension Protection Act of 2006 (PPA), a quadrupling of Pension Benefit Guaranty Corporation (PBGC) premiums, and the growth of the pension risk-transfer business from approximately $1 billion per year to $25 billion per year. “These changes have caused plan sponsors to rethink the way they operate their pension plans, especially in the areas of plan design, asset allocation, investment policy, risk management and fiduciary partnerships, Vanguard says.

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About one-third of plans are open and active (33%), frozen with no future benefit accruals (34%) and closed to new entrants (32%). Compared with 2010, significantly more pension plans are closed to new entrants and frozen to future benefit accruals in 2019, Vanguard found. However, the percentage of closed and frozen plans in 2019 is similar to that of 2015. The firm says this leveling off of the closing and freezing of pension plans shows that those plans that remained open and active following the global financial crisis, through the introduction of the more stringent funding and marked-to-market reporting requirements, and despite the increases in PBGC premiums are more likely to be dedicated to keeping that plan open in the future.

Nearly two-thirds of respondents stated they intend to make a change to their pension plan, but only 15% expect to make a plan design change where they would either close or freeze their pension plans. Nearly half of those surveyed are expected to execute a risk transfer, meaning they expect to purchase annuities for retirees, offer lump sums to terminated vested participants or terminate the plan. Reducing plan costs (68%), reducing the plan’s impact to the company’s financials (55%) and reducing cost volatility (52%) are the top reasons cited.

Thirty five percent of DB plan sponsors surveyed said their primary financial objective is minimizing volatility in plan contributions and funding ratio, while 30% said it is minimizing the long-term cost of the pension plan, and one-quarter reported it is obtaining full funding.

Investing to meet objectives

Given their concerns and objectives, Vanguard expected somewhat of a shift in their portfolios’ asset allocations from 2015, but this was not the case. The overall average asset allocation reported nearly mirrored that reported in Vanguard’s 2015 survey: 48% invested in equities, 39% in fixed income, 2% in cash, and 11% in alternatives such as hedge funds, private equities, and commodities. In the 2019 survey this shifted slightly to: 43% invested in equities, 38% in fixed income, 4% in cash, and 16% in alternatives.

In response to risk, Vanguard found DB plans are lengthening bond durations. The reported long-term bond allocation increased from 38% in 2015 to 44%, while the allocation to short- and intermediate-term bonds decreased by a similar percentage. Also, with respect to the fixed income sub-allocation, the corporate to Treasury allocation reported showed a slightly higher allocation to Treasury bonds than in 2015 (38% compared to 35%). Other Vanguard research has found that a long Treasury allocation of 20% to 35% combined with a long corporate allocation of 65% to 80% has the highest historical correlation and regression fit to the FTSE Pension Liability Index (FPLI).

The most common planned investment policy change was continuing to decrease the allocation to return-seeking assets, such as equity, and the increase of liability-hedging fixed income allocations.

However, some providers in the DB plan market believe allocations to return-seeking assets should not be decreased but rather more diversified.
Administration November 13, 2019

Employer Student Debt Help Not Reaching All Who Need It

A Fidelity analysis found Baby Boomers and Generation X have high student loan debt, but as it may be for their children’s education, many employer programs are not helping.

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New data derived from Fidelity Investments’ Student Debt Tool shows, although the majority of users of the tool who reported their debt are Millennials, users who are Baby Boomers or Generation X actually carry a higher average student debt loan burden.

Among the 1,599 Baby Boomers, the average loan balance is $56,652 and the average monthly payment is $565; among the 6,996 Generation X users, they are $55,870 and $490, respectively. For the 21,034 Millennial users, the average loan balance is $45,548, and the average monthly payment is $469.

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Asha Srikantiah, head of the Fidelity’s Student Debt program, based in Boston, says it is eye-catching to see older generations have higher student loan debt, and that Fidelity’s analysis is backed up by other sources, such as the Federal Reserve Bank.

She says the loan type that is fastest growing is the Parent PLUS loan, and the fact that tuition for higher education institutions keeps rising could be why Generation X and Baby Boomers have higher outstanding student debt. Both Baby Boomers and Generation X could have a combination of their own student loans and loans for their children’s education.

The Parent PLUS Loan is a federal direct student loan available to the parents of dependent undergraduate students. These loans do not enjoy certain government programs to reduce student loan debt. Srikantiah explains that Parent PLUS loans can be refinanced, per the lender’s terms of refinancing, but Federal student loan forgiveness programs and most government repayment programs are not available for loans to parents, only for direct federal loans.

As for employer help with student debt, Srikantiah says some employers believe Parent PLUS loans should be made eligible for student debt direct contribution benefits, but some say these benefits are only good for those paying down debt for their own education. “To date, more employers are only offering help for employees with loans for their own education,” she notes.

But as employers see the statistics, Srikantiah believes they will start thinking about changing their benefit parameters. “What we might see is, as more broad types of benefits designs grow, employers may choose to include Parent PLUS loans because solutions may not create the same type of budgeting burden on employers while enabling more employees to cater benefits to their best interest,” she says.

For example, Unum is enabling employees to choose to have a monetary contribution of some of their PTO days paid toward student debt, and Unum says Parent PLUS loans are eligible. Montefiore St. Luke’s Cornwall offers the same thing.

One thing Fidelity is excited about and working on is pre-college guidance. “We are looking to better equip families of high school students with tools and education to plan for and manage the costs of a child’s education, Srikantiah says.

“We are seeing a lot of employers recognizing that employees may not have student loan debt yet, but they may have it in the future as their children approach college age,” she adds.

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