Pension and BenefitsRisk Management

Spring and Derisking in the Air for Defined Benefit Pension Plans

By March 25, 2021No Comments

A strong stock market and higher interest rates plus regulatory relief bring smiles to some DB plan managers.

An upbeat mood befitting the beginning of spring prevailed at this week’s meeting of NeuGroup for Pensions and Benefits. With the yield on the 10-year US Treasury note rebounding to pre-Covid levels and equities trading in the vicinity of all-time highs, a summer of full funding is within sight for many plans.

  • Below are takeaways distilled by NeuGroup executive advisor Roger Heine, who helped lead the meeting.

Derisking in fashion. Members at several companies did not stay on the sidelines—they jumped into the game by sticking to established policies to derisk as financial markets moved in their favor. More than one said their moves came after hitting glide path triggers.

  • These pension fund managers reduced equity exposure and increased fixed income, in some cases by using derivatives to move quickly with minimal transaction costs. 
  • Members are also well aware that some of the stocks within the big market indices such as the S&P 500 trade at bubble-level multiples, with investment managers steering clear of these potential reefs.

American Rescue Plan Act. More spring thawing arrived following the passage this month of the American Rescue Plan Act (ARPA).  Kevin McLaughlin, of meeting sponsor Insight Investment, described how alterations to complex funding calculations effectively mean no required pension funding for years to come.  

  • While this will particularly aid highly leveraged companies with big pension deficits, most of the NeuGroup participants with better funded plans really won’t be impacted.
  • These members indicated that their funding decisions are more driven by avoiding steep variable rate PBGC fees or potentially triggering tax deductions should corporate tax rates increase in the future.  
  • The ARPA also provides $86 billion to bail out qualifying multiemployer pension funds; but again, this has little impact on members except that these funds might compete for investment-grade fixed-income product down the road.

Covid mortality. In response to a member question, Mr. McLaughlin also addressed whether Covid mortality—approaching 550,000 in the US—will have any impact on mortality tables used to calculate pension liabilities.  

  • While there is a likely a onetime impact on liabilities, he said it is unlikely that there will be any material shift in life expectancy as negative factors such as deferred health screenings and weakened Covid survivors may be offset by better health practices and pharmaceutical breakthroughs following Covid vaccine innovations.
Justin Jones

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