Administration March 13, 2013

Underfunding Drives Pension Investment Strategies

March 13, 2013 (PLANSPONSOR.com) – Companies’ decisions about their defined benefit (DB) pension plans are being driven by desires to shed pension risk and the need to generate enough investment returns to fund long-term liabilities.
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According to Greenwich Associates latest U.S. Investment Management Study, average funding ratios for U.S. corporate pension funds fell to 81% in 2012 from 89% in 2011, driven mainly by declining interest rates. More than 60% of all corporate DB pension plans are now funded at 85% or less, and only 10% of plans are fully funded.  

Greenwich Associates research shows striking differences in portfolio allocations between well-funded and underfunded plans. Among the 12% of U.S. corporate funds with funding ratios of 105% or higher, fixed income currently makes up approximately 61% of their investment portfolios. Meanwhile, funds with ratios of 75% or less allocate only 31% to fixed income. The difference in equity allocations is equally stark.  

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“While plan sponsors with weaker funding ratios have found their intentions to move in a similar direction stymied, many have used the past two years to put in place dynamic allocation plan and glide paths for de-risking as interest rates rise and/or funding levels improve,” said Greenwich Associates Consultant Goran Hagegard.   

Public pension funds are attempting to improve investment returns by shifting assets into riskier asset classes. They are moving in this direction because they are underfunded, they face an environment of declining investment returns and they see little hope of cash infusions from struggling municipal and state plan sponsors.

“Results from our study show that from 2011 to 2012 public funds generally made no progress in closing funding gaps,” said Greenwich Associates Consultant Andrew McCollum. Average solvency ratios of U.S. public defined benefit pension plans held steady at 77%, and Greenwich Associates estimates show that nearly three-quarters of plans are significantly underfunded. Over that same period, public funds decreased their average actuarial earnings returns on plan assets to 7.5% from 7.9%.  

Endowments and foundations appear to be doubling down on the so-called “Yale Model” by planning significant new investments in alternative asset classes and reductions in allocations to traditional equities and fixed income.  

The mix of traditional securities versus alternative asset classes went largely unchanged by endowments and foundations from June 2011 to 2012. However, 27% of endowments and foundations say they expect to significantly increase allocations to private equity in the next three years, and 24% plan to make meaningful additions to hedge fund allocations.   

In addition, more endowments and foundations plan to increase allocations to commodities and equity real estate than decrease allocations to those asset classes. Meanwhile, the percentage of endowments and foundations planning to significantly reduce allocations to domestic equities is nearly double the percentage planning increases. In fixed income, the bias toward cuts is even greater.   

Funds’ satisfaction with the performance of their alternative investments will likely hinge largely on the reasons for their allocations. “Endowments and foundations hoping to duplicate the investment returns of the Yale model’s early adopters might end up disappointed,” said Greenwich Associates Consultant Kurt Schoknecht. In the 12-month period ending June 30, 2012, the alternatives-heavy portfolios of endowments and foundations generated average investment returns of only 1%, compared to the 4% average returns produced by public pension fund investment portfolios and the 6% generated by corporate pension funds.
Opinions March 13, 2013

SECOND OPINIONS: Agencies Clarify Required Coverage for Contraceptives

March 13, 2013 (PLANSPONSOR.com) - DOL, HHS, and Treasury recently issued several FAQs related to questions they have received on the Affordable Care Act’s (ACA's) preventive care provisions.
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The ACA requires that group health plans cover certain preventive care services at 100% with no cost sharing.  Prior guidance clarifies that plans are permitted to limit such coverage to in-network only and to set other “reasonable medical management techniques,” as long as these limits are not contrary to the express recommendations identified by the preventive care guidelines.     

HHS adopted women’s preventive care guidelines that plans were required to cover at 100% for plan years starting on or after 8/1/12 (except grandfathered plans).  In particular, coverage for contraceptives under the women’s preventive health rules has raised many questions.  Some of these were addressed in the new FAQs, which we highlight here.  

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What contraceptives must a plan cover?  

The women’s preventive care guidelines (found at http://www.hrsa.gov/womensguidelines/), require that a health plan cover all FDA-approved contraceptives for women.  The guidelines also require that the plan cover sterilization procedures and patient and education and counseling for all women of reproductive capacity.  This coverage must be at 100% with no cost-sharing.  

May a plan cover only oral contraceptives, such as birth control pills, and still satisfy the ACA requirements?  

No, the FAQs clarify that plans must cover the “full range” of FDA-approved methods, including barrier methods, hormonal methods, and implanted devices.    

Is the plan required to cover other over the counter (OTC) contraceptives, such as sponges and spermicides?  

The FAQs state that items that are generally available “over the counter” only must be covered if they are: (1) FDA-approved; and (2) prescribed for a woman by her health care provider.  This means that a plan can require a prescription for these items, but if a woman obtains a prescription, the plan must cover the item or service at 100%.

Are plans required to cover IUDs and other implants?  What about removal of such devices?  

Yes - the FAQs clarify that if the device is an FDA-approved contraceptive device, it must be covered at 100%.  The FAQs also state that services related to follow-up, management of side effects, counseling for continued adherence, and device removal would be required to be covered at 100%.  

Must a plan cover contraceptives for men, such as male condoms?  

No - the FAQs state that the required coverage does  not include contraception for men.  

What limits may a plan implement with respect to women's contraceptive coverage?  

As discussed above, the FAQs re-state the regulation that allows a plan to impose "reasonable medical management techniques" to limit coverage where not contrary to the specific preventive care guidelines.  The FAQ provides clarification on the types of medical management techniques that would be permitted.  For example, a plan may require a prescription for over-the-counter drugs or devices or may limit coverage to generic drugs only.  The FAQ goes on to clarify that, for this type of limitation, the plan must accommodate any individual for whom the generic drug is not available or would be medically inappropriate, as determined by the individual's health care provider.  In that case, the plan may need to cover a brand drug at 100% with no cost sharing. 

 

The FAQs can be found at www.dol.gov.ebsa (ACA FAQs Part VII). 

Got a health-care reform question?  You can ask YOUR health-care reform legislation question online at http://www.surveymonkey.com/s/second_opinions    

You can find a handy list of Key Provisions of the Patient Protection and Affordable Care Act and their effective dates at http://www.groom.com/HCR-Chart.html     

Contributors:  

Christy Tinnes is a Principal in the Health & Welfare Group of Groom Law Group in Washington, D.C.  She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare.  She represents employers designing health plans as well as insurers designing new products.  Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.  

Brigen Winters is a Principal at Groom Law Group, Chartered, where he co-chairs the firm's Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.  

 

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

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