Benefits April 21, 2014

Financial Stress Spurring Positive Action

April 21, 2014 (PLANSPONSOR.com) – Nearly half of American workers feel stressed about their finances, although worry seems to diminish among those seeking professional advice.
Reported by

The Principal Financial Group’s latest Principal Financial Well-Being Index shows widespread financial concern actually seems to be having a positive impact on financial wellness and savings decisionmaking. For instance, the research suggests more than half of employees (52%) have taken action to monitor their spending levels in the past year, and nearly two in five (39%) created a budget to keep finances in check, up significantly from 28% who created a budget two years ago.

The survey identified other positive financial behaviors that are emerging alongside generally high levels of financial stress. In order to help maintain their financial health in the event of a job loss or other unexpected event, nearly three in five (57%) now have an emergency fund in place. Those who work with a financial professional, the Principal says, are 1.5 times more likely to have an emergency fund in place. But the news isn’t all positive, as nearly 20% admit they have recently dipped into their emergency fund to cover monthly expenses.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

“It’s encouraging to see American workers planning for unforeseen hurdles by giving themselves a financial checkup and setting aside money in an emergency fund,” explains Luke Vandermillen, a vice president at the Principal Financial Group. “Despite a few missteps, like using the fund on monthly bills, these positive behaviors show individuals are making strides and taking personal responsibility to improve their short and long-term financial well-being.”

Interestingly, worries about saving enough for retirement seem to decline with age, as only about one-third (35%) of Baby Boomers say they feel stressed about finances, compared with half of Generation Y workers (51%). Those working with a financial professional were also much less likely to feel stressed about their finances than the general working population, at 33%.

In another positive sign, findings show more American workers will use 2014 tax refunds to beef up their nest eggs, with 50% of workers planning to save or reinvest their refunds—up 5% from last year. More than a third (38%) plan to pay down or pay off short-term debt with a tax refund, and slightly less than a quarter (24%) will pay down or pay off longer-term debt. The majority of American workers (68%) expect a tax refund this year.

Vandermillen says the quarterly release of index data shows American workers increasingly recognize the long-term financial benefits of staying healthy. In fact, American workers view themselves as more physically fit (57%) than financially fit (28%). And while employees report lagging financial health, most (84%) recognize that maintaining physical health is an investment in their financial future.

“American workers recognize the long-term financial benefits of staying healthy, but financial stress is often a constant pressure that can have a significant impact on their physical health,” Vandermillen says. “With spring in full swing, now is a good time for Americans to apply their good fitness habits to their financial lives as well. Mark some time on the calendar for financial spring cleaning, meet with a financial adviser, set goals and take action.”

Opinions April 21, 2014

De-risking Corporate Defined Benefit Pension Plans

April 21, 2014 (PLANSPONSOR.com) - The funded status of corporate defined benefit (DB) pension plans has been experiencing unprecedented volatility since 2000 and, for plan sponsors, it’s been a high-speed roller coaster ride.
Reported by

The chart in below tells the story. It shows the history of the Milliman 100 Monthly Pension Funding Index, which measures the funded status of the 100 largest U.S. corporate defined benefit pension plans.

Milliman byline Pension Funding Index

Get more!  Sign up for PLANSPONSOR newsletters.

When Milliman established the Index in 2000, DB plans were in a surplus position. The Milliman 100 pension plans fell to a deficit position in the wake of the dot-com crisis and the 9/11 terrorist attacks of 2001. An all too brief economic and funded-status recovery followed in 2007 and early 2008, but those gains were obliterated before the start of 2009 because of the real estate crisis and recession. Deficits in funded status have existed from late 2008 through today, the first quarter of 2014.

Now a surplus position is approaching for the third time. Investment returns for the Milliman 100 plans exceeded expectations in 2013, as they have done for four of the last five years. A strong rally in U.S. equities led the way, as the S&P 500 Index advanced 29.6%. Overall, Milliman 100 plans produced a 2013 investment return of 11.2%, as the negative performance of fixed income investments tempered total returns.

This is an alert to plan sponsors of a strategic opportunity: Assuming that a pension plan reaches a surplus position, a variety of tools exist that can maintain that surplus into the future, reducing the risk that the plan will go into deficit again. Every plan sponsor should at least consider risk reduction measures as their plans approach a fully funded position. It is also incumbent upon plan advisers to discuss de-risking tactics with their clients. In general, these discussions can be structured as an introduction to a three-step process.

The first step in a de-risking program is to understand the plan’s risk exposure. This is a matter of systematically working through the different categories of pension risk. In each case, the plan sponsor needs to analyze how its plan’s specific exposure to risk impacts the balance sheet, pension expense, and cash contributions.

The second step involves determining the plan sponsor’s risk tolerance. What is the plan sponsor most concerned with and to what extent—interest rate risk, investment risk, administrative risk? Plan sponsors need to prioritize the risks they wish to mitigate. Keep in mind different de-risking strategies will be implemented depending on whether the top priority is managing cash flow, the balance sheet, or volatility. Costs are also a factor; there may be some trade-off between what de-risking measures a plan sponsor would like to implement and what is affordable given budget constraints.

The third step views pension risk in the context of the enterprise’s acceptable risk tolerance, and deals with bringing the pension plan’s risk exposure within an acceptable tolerance level as defined by the enterprise. What could cause the company to fail? How do total compensation and benefits strategies impact the company’s long-term health? This is easiest to see in an extreme example such as General Motors (GM). Some analysts commented that GM’s balance sheet looked more like an insurance company, which was due to the magnitude of its pension obligations. GM’s de-risking measures were taken to reduce the size of the footprint its pension plan had on its balance sheet, offloading liabilities despite paying a heavy premium to a third party for taking on its pension risk.

However, on many companies’ balance sheets, the pension plan does not show up as a first-order-of-magnitude line item. Therefore, the enterprise risk is correspondingly lower, which implies less justification for pursuing costly strategies such as pension risk transfers as the first option.

In subsequent articles, we will cover topics in greater detail: The major risks facing DB plans today; managing and mitigating risk, which will catalog the key options on both the liability and the asset sides of the equation; and moving risk and the risks of de-risking, which will look at third-party risk transfers—and what can go wrong.

 

John Ehrhardt and Zorast Wadia, principals and consulting actuaries with Milliman in New York  

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.   

Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.

«