Data and Research January 18, 2023

Employer Satisfaction Slows for ‘Key Employee’ Retirement Plan

Employers that offer NQDC plans have increased their use of bad actor forfeiture clauses, the Plan Sponsor Council of America finds.

Reported by

Fewer employers using nonqualified deferred compensation plans were very satisfied with the current structure of their plan, data from the Plan Sponsor Council of America shows.

The research found 20% of employers that offered an NQDC plan did not make any plan changes in the last year and that 25% planned to make changes in 2023. Employer satisfaction with the retirement plans declined, shown by 28.2% of employer respondents that were very satisfied, compared to 38.2% in 2020, according to PSCA data published earlier this month.

The PSCA survey showed the percentage of employers making contributions to their NQDC plans increased to 77.3% in 2022, up from 74.2% in 2020, the last year for which data is available. Employer contributions often indicate a restoration match to compensate for a match missed due to qualified plan contribution limits, and those were offered by 42.2% of employers, an increase from 27.5% in 2020. Meanwhile, 19.7% of employers noted participation in their NQDC plan has increased compared to a year ago.

Often used by employers to attract and retain talent—specifically highly compensated corporate executives—NQDC plans allow an agreement between the employee and plan sponsor to defer a portion of their annual income until a future date.

Among plan sponsor respondents, the most common reason they offered NQDC benefits was to “have a competitive benefits package,” at 87.9%. Among respondents, 83.6% said the deferred compensation plan is used to retain eligible employees, according to PSCA research.

Additionally, half of employees have made contributions to the plan when offered the opportunity, deferring an average of 10% of pay to their accounts, the PSCA found.

The percentage of eligible employees with plan balances has fluctuated: it was 61.1% in 2022, compared to 66.1% in 2020 and 60.4% in 2016, PSCA’s research found.

Although employers are using NQDC plans to attract talent, the plan designs increasingly include tactics to retain key workers, as almost 40%—up from 23.7% in 2021—have a bad actor forfeiture clause, and nearly 30% have a non-compete provision that forfeits the NQDC benefit if the employee leaves to work for a competitor, PSCA research found.

The forfeiture rules governing NQDC plans allow companies to recoup compensation from “bad actors,” such as executives that have participated in bribery, according to law firm Shearman & Sterling.

The PSCA report surveyed companies that offer NQDC plans, but data from a different survey show that the likelihood of a company offering an NQDC plan tends to correspond directly to number of employees. According to the PSCA, 81.3% of companies with at least 5,000 employees and 54.8% of companies with between 1,000 and 4,999 employees offer such plans. For all plans, including those larger ones, the rate was 32.7%.

The PSCA 2022 NQDC Plan Survey was conducted in October 2022 and includes responses from 135 organizations offering an NQDC plan to employees. The full survey is available for purchase from the PSCA.

Data and Research January 18, 2023

U.S. State, Municipal Pensions Saw Funding Statuses Fall 6.6% in 2022

The Equable Institute released its final 2022 projections for U.S. state and local public pensions funding status, revealing the best—and worst—funded state pensions.

Reported by

The national average funded ratio for U.S. state and local public pension plans is estimated to have declined 6.6% last year, from 83.9% in 2021 to 77.3% in 2022, according to a recently released end-of-year report on public pensions from the Equable Institute. The drop is primarily due to negative asset returns, which averaged -6.14% in 2022, falling well short of assumed annual returns laid out in pension plan designs, which had projected an average of a 6.9% annual gain.

Equable used figures from 76.4% of the 225 retirement systems with available data that reported preliminary investment returns for their full fiscal 2022 to inform the prediction. The remaining plans with available data have fiscal years that end on December 31 and will be reporting in the coming months.

During 2022, states and cities made full contributions to their pension funds and, in many cases, even provided supplemental contributions. However, poor investment returns in 2022 drove down the average funded ratio for state and local plans.

Equable found that state and public pensions in Connecticut, Mississippi, New Jersey, Illinois, Kentucky and South Carolina are at a critical funding level, meaning their pensions are less than 60% fully funded against the liabilities due to pensioners. Kentucky, at 47.3% funded, and Illinois, at 50% funded, were the worst funded states in the nation to end 2022.

Conversely, Washington, D.C. and Washington state topped Equable’s aggregate funded ratio rankings, with funded ratios of 103.4% and 102.9%, respectively. Similarly, pension systems in Iowa, Tennessee, New York, Nebraska, Wisconsin and South Dakota earned top marks by maintaining average funded statuses greater than 90%, a ratio deemed “resilient” by Equable.

2022’s negative returns erased nearly half of the funded ratio gains of 2021, which Equable explains was an outlier. “Last year’s incredible investment returns (24.8% on average) did include some future returns that were ‘pulled forward’ and ultimately led to a market correction,” according to the firm’s report.

As a repercussion of market movements, the total pension funding shortfall, also known as an unfunded liability gap, will increase to $1.45 trillion in 2022, reversing the one-year drip below the $1 trillion funding gap line in 2021.

“Strong investment returns in 2021 led to a decline in unfunded liabilities, down to $986.6 billion, [though] that pension debt has increased back up to $1.45 trillion as of 2022’s calendar year end, due to poor investment returns,” the Equable report stated, noting that the better-than-expected performance in private equity during 2022 kept this increase from being even greater.

According to the report, Equable does not expect most pension funds to hit their assumed rates of return for 2023, due to a variety of reasons, including: major public market indices being effectively flat over the last six months; the lag in reporting equity values on non-mark-to-market assets, such as private equity placements; the war in Ukraine; and the specter of more interest rate increases by the Federal Reserve. “Pension fund trustees should be considering lower investment assumptions, and state legislatures should be looking at larger contribution rates,” the report states.

Investment consultancy Wilshire found in an end-of-year report on the funding statuses of U.S. state public pensions that the aggregate funded ratio for U.S. state public pension plans increased by 3.1% during the fourth quarter of 2022, finishing at a funded ratio of 68.4%. Despite the gains in funding status during Q4, funding statuses in the quarter in November, estimated at 70.5% to end that month.

“Calendar year 2022 caps a volatile year for markets with the FT Wilshire 5000 Index ending 2022 down 19%, which is its fourth worst calendar year return,” wrote Ned McGuire, managing director at Wilshire. “This quarter’s ending funded ratio has fallen to its level [not seen since] the end of the second quarter of 2020, after the onset of COVID-19.”

«