Deals and People April 10, 2018

Fiduciary Governance Group Launched by Stradley Ronon

The fiduciary governance group is designed to counsel investment committees and service providers, with a focus on avoiding and responding to fiduciary breach litigation, among other topics.

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Stradley Ronon announced the formation of a new fiduciary governance group, which the firm is billing as a “multi-disciplinary practice,” to be led by co-chairs Lawrence Stadulis and George Michael Gerstein.

According to the firm, the fiduciary governance group includes 15 members. It will support financial institutions that “may be subject to multiple and conflicting sets of fiduciary or best interest obligations arising under federal and state law as a result of the nature of the different yet interrelated services they provide to their customers.”

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“The fiduciary governance group is designed to counsel investment committees and intermediaries, such as investment advisers, banks, broker/dealers, retirement plan/IRA service providers, insurance providers and mutual fund directors, by identifying and making sense of this regulatory patchwork and helping clients understand the interplay of these federal and state rules,” the firm states.

Beyond helping advisers and financial intuitions prevent and respond to the wide sweep of Employee Retirement Income Security Act fiduciary breach claims filed by participants today—from excessive fee suits and self-dealing challenges to stock drop litigation and debates over the use of various capital preservation vehicles—the new governance group will track developments and emerging trends in the investing landscape, such as broader use of the environmental, social and governance (ESG) investing theme.

The group also pledges to “actively track the burgeoning state legislative efforts to impose fiduciary or comparable investment advice standards of care.” Such efforts are well under way in Nevada and New York, just to name two of many venues.

Industry watchers will not be surprised by this move from Stradley Ronon. As laid out in a very expansive class action litigation analysis published recently by another law firm specializing in ERISA, Seyfarth Shaw, plaintiffs found some significant success in 2017 when it came to winning class certification. Looking across all 12 U.S. federal appellate court circuits, in total 17 groups of plaintiffs earned class action certification in an ERISA challenge during 2017, whereas just five groups of plaintiffs formally saw their appeals for class certification denied. Obviously, class certification is still an early procedural step in any litigation, but the overwhelming success of ERISA plaintiffs’ attorneys in earning class certification across a wide variety of cases is an important trend and may speak to the validity of at least some of their broad claims, attorneys warn.

Administration April 10, 2018

Pensions Keep Funded Status Increase for the Year So Far

Despite two months in a row of funded status losses, most firms that track pension funding find the average funded status is still up for the year.

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The estimated aggregate funding status of pension plans sponsored by S&P 1500 companies decreased by 1% in March to 87% at the end of the month, as a result of losses in the equity markets, according to Mercer.

 

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As of March 31, the estimated aggregate deficit of $286 billion increased by $24 billion as compared to the $262 billion measured at the end of February.

 

The aggregate funded ratio for U.S. corporate pension plans decreased by 1.6 percentage points to end the month of March at 86.8%, yet remains up 3.6 percentage points over the trailing twelve months, according to Wilshire Consulting.

 

The monthly change in funding resulted from the combination of a 1.1% increase in liability values and a 0.8% decrease in asset values. Despite March’s decline, the aggregate funded ratio is up 2.2 and 3.6 percentage points year-to-date and over the trailing twelve months, respectively. 

 

“March was the second consecutive month that saw funded ratios driven lower by negative total asset returns,” says Ned McGuire, managing director and a member of the Pension Risk Solutions Group of Wilshire Consulting. “March’s 1.6 percentage point decrease in funding was the largest drop in 21 months. The retracement in funding was led by a decline in global equities and a rise in liability values that resulted from a nearly 10 basis points decrease in the bond yields used to value pension liabilities,”

 

According to Northern Trust Asset Management, during the month of March, the average funded ratio for corporate pension plans decreased from 85.7% to 84.5%. Global equity markets were down more than 2% during the month, and average discount rate decreased from 3.94% to 3.89% during the month

 

Both model pension plans October Three tracks lost ground last month. Traditional Plan A lost 2% while the more conservative Plan B lost less than 1%. For the year, Plan A remains almost 3% ahead, while Plan B is up less than 1%. October Three explains that after a strong January, during which stocks and interest rates rose, capital markets reversed course last month and pension sponsors have given back much of the early gains. Still, at the end of the first quarter, most plans are in somewhat better shape than at the close of 2017 on the strength of lower liabilities. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a cash balance plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.

 

Conning’s pension funded status tracker model follows the funded status of the average corporate pension plan in the Russell 3000 universe, and found that in March, funded status of the average Russell 3000 pension plan fell by 1%, from 86% in February to 85%. Year-to-date, the funded status is still up by 2%.

 

Q1 2018

 

Legal & General Investment Management America’s (LGIMA) Pension Fiscal Fitness Monitor, a quarterly estimate of the change in health of a typical U.S. corporate defined benefit pension plan, shows that pension funding ratios rose over the first quarter of 2018. LGIMA estimates the average funding ratio rose from 84.2% to 87.3% over the quarter.

 

This was primarily due to the change in plan discount rates. Global equity markets decreased by 1.75% and the S&P 500 decreased 2.11%. However, this was offset by plan discount rates rising 44 basis points, as Treasury rates increased by 30 basis points and credit spreads widened by 14 basis points. Overall, liabilities for the average plan fell 5.07%, while plan assets with a traditional “60/40” asset allocation only decreased 1.55%, resulting in a 3.1% increase in funding ratios over the first quarter of 2018.

 

Ciaran Carr, senior solutions strategist at LGIMA, said, “We continue to see an uptick in demand for more customized strategies to help hedge interest rate risk and lock in funding ratio gains after benefitting from an increase in discount rates. Liability benchmarking, completion management, and option-based hedging strategies remain in high demand. We have also seen an increase in the demand for custom credit strategies, particularly from plans focusing on a pension risk transfer or self-sufficiency strategies.”

 

Aon reports that, year-to-date, the aggregate funded ratio improved from 85.6% to 86.5% and the funded status deficit decreased by $31 billion. As per Aon’s estimates, this change was driven by a decrease in liability of $79 billion, offset by an asset decrease of $48 billion year-to-date.

 

Pension liabilities decreased by 3.67% as interest rates increased. Ten-year Treasury rates were up by 34 bps over the quarter and credit spreads narrowed by 2 basis points (bps), resulting in a 32 bps increase in the discount rate over the quarter for an average pension plan, according to Aon.

 

However, Barrow Hanley, a value-oriented investment manager, says its latest corporate pension funded status report finds that average funded ratios fell slightly to 86.7% as of March 31, from 87.1% as of December 31, 2017. Even though liabilities went down 1.3%, pension assets had an even greater drop in Q1 at 1.8%, according to the firm.

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