Compliance June 13, 2017

Sponsor Settles Northrop Grumman ERISA Suit

A bench trial began this March 14, and the settlement was initially struck after three days of trial.

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Employees of Northrop Grumman have reached an agreement with their employer to resolve claims in the long-running matter of In re Northrop Grumman Corp. ERISA Litigation, a class action lawsuit initially filed back in 2006.

The parties reached a $16.75 million settlement amount, to be used to improve the administration of the retirement plans in question and to compensate employees and retirees. In the underlying suit, the plaintiffs alleged, among other claims, that Northrop fiduciaries violated their duties to employees in two 401(k) retirement plans by improperly causing those plans to pay Northrop for administrative services.

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The case was interpreted as a classic example of an Employee Retirement Income Security Act (ERISA) self-dealing challenge. This type of charge is often leveled against the retirement plans being run by investment providers and recordkeeping providers themselves, but increasingly non-investment-industry sponsors are accused of similar conflicts.

A motion for approval of the settlement was filed by the parties in the Court of Judge Andre Birotte Jr. of the U.S. District Court for the Central District of California. A bench trial began this March 14, and the settlement was initially struck after three days of trial. The settlement extends to conduct occurring between September 28, 2000, and May 11, 2009, according to the plaintiffs.

The settlement does not cover claims raised in Marshall v. Northrop Grumman Corp., a second case against Northrop last September. This second piece of litigation posits similar allegations on behalf of Northrop employees and retirees, for conduct occurring from 2010 to the present. That matter is also playing out in the Central California District Court.

Administration June 13, 2017

May DB Funded Status Measures Mixed

The differences depend on what DB plans are tracked or how DB funded status is tracked.
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According to October Three, pension plans managed to tread water last month, with assets and liabilities growing about 1% each during May for both model plans it tracks. Through the first five months of 2017, Plan A is ahead 2% to 3%, while Plan B is up almost 1%.

For October Three, 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. It assumes overhead expenses of 1% of plan assets per year, and assumes the plans are 100% funded at the beginning of the year and ignore benefit accruals, contributions, and benefit payments in order to isolate the financial performance of plan assets versus liabilities.

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Overall, its traditional 60/40 portfolio gained 1% in May and is now up 6% to 7% for the year, while the conservative 20/80 portfolio was also up 1% last month and is now ahead 4% during 2017.

However, Milliman found the funded status of the 100 largest corporate defined benefit (DB) pension plans decreased by $22 billion during May as measured by the Milliman 100 Pension Funding Index (PFI). The deficit grew to $279 billion from $257 billion at the end of April due to a decrease in the benchmark corporate bond interest rates used to value pension liabilities. The funded status decline was partially offset by investment returns during May. As of May 31, the funded ratio fell to 83.8%, down from 84.9% at the end of April.

Legal & General Investment Management America (LGIMA) estimates that pension funding ratios decreased 0.3% over the month of May, with modest losses driven mainly by a fall in the Treasury rate and a tightening in credit spreads, offsetting the gains in the global equity markets. LGIMA estimates plan discount rates fell 12 basis points, as Treasury rates fell by 9 basis points and credit spreads tightened by 3 basis points. Overall, liabilities for the average plan were up 2.1%, while plan assets with a traditional “60/40” asset allocation increased by 1.7%.

Mercer’s estimate of the aggregate funding level of pension plans sponsored by S&P 1500 companies found it remained static at 83% funded status in May, with a decrease in discount rates offsetting positive equity markets. As of May 31, the estimated aggregate deficit of $391 billion represents a decrease of $1 billion as compared to the deficit measured at the end of April.

The aggregate deficit is down $17 billion from the $408 billion measured at the end of 2016, according to Mercer. The S&P 500 index gained 1.2% and the MSCI EAFE index gained 3.1% in May. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 12 basis points to 3.82%.

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