DB Plans in Decline Face Increasing Risks

“I don’t think many sponsors fully understand that plans in decline have financial characteristics that are entirely different from those that are growing,” says Kevin Wagner with Willis Towers Watson.

The current context of pension regulation, and the steps sponsors have taken to wind down their plans, create new and significant risks for defined benefit (DB) plans, notes Kevin Wagner, senior consulting actuary at Willis Towers Watson, in Southfield Hills, Michigan.

The first he labels discipline risk—failing to maintain a realistic level of annual contributions. “One of the reasons DB plans are underfunded is that sponsors have been able to take holidays from contributions,” granted by Congress in 2012 and 2014, then most recently extended in the Bipartisan Budget Act of 2015. He explains: “When companies hear siren calls for their capital, managers have found it more compelling to fund a new factory than contribute to the pension plan, especially when they didn’t have to.”

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Lower funding leads to Wagner’s second evolving concern, which he terms decumulation risk. “A plan is much more difficult to sustain when its funding ratio gets down to, say, 70%. For most of my time in the business, pension plans were growing—the money coming in from sponsors’ contributions and investment income was greater than the money going out.”

These days, the outflows are the driving factor: “I don’t think many sponsors fully understand that plans in decline have financial characteristics that are entirely different from those that are growing,” Wagner says. For illustration, if a plan is funded at just 70%, with $70 in assets and $100 in liabilities, and then distributes $10 in benefits, its funding falls to 66% ($60 in assets against $90 in obligations). He adds: “There is a snowball effect—from a low start, the funded ratios will continue to decrease as the plan goes through the natural process of paying its benefits.”

The declining asset pool brings on further risk, as the sponsor has to rein in the investment horizon of the portfolio. “When plans are expanding sponsors can take risks in the portfolio, such as in investing in stocks, that pay off over a whole business cycle,” Wagner says, “but in decumulation, equity investments may have to be liquidated to pay obligations, and may not live out a whole cycle. As plans are in a spiral to a terminal state, the time value of return and volatility have to be considered differently.”

A Little Friday File Fun

In Bukit Mertajam, Malaysia, a man attempted to steal about $7 worth of food from a local supermarket. According to news reports, when caught, the man confessed and said he was having a hard time feeding his three children after his wife went into a coma after childbirth. The manager of the store was so moved that instead of calling police, he offered the man money and a job offer.

In Denver, Colorado, a woman entered a taxi, threatened the driver with a knife, kicked him out and drove off with the vehicle. However, she had told him when she got in the vehicle she wanted to go to a particular 7-Eleven store. According to the local ABC News station, although the woman ditched the cab, she still walked to the store to which she had requested to go, and that’s where police arrested her.

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In Franklin, Tennessee, police were notified of a chicken that had walked onto a road in the downtown area. They tweeted: “Officers are trying to wrangle a *chicken* in the downtown Franklin area. It’s crossed the road & we’re working to determine why.” The chicken was safely captured.

Near Cleveland, Ohio, police were called when a 74-year-old man rear-ended another car in a Panda Express drive-thru. Thinking he was impaired, officers asked him to recite the alphabet. The man told police he was unfamiliar with it.

A cute way to get your baby interested in eating green beans.

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How far back could you go and still understand English?

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In Louisiana, Remember Beaker from The Muppets? Well apparently he’s been arrested for a church burglary.

BeakerMugshot

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