On March 27th, 2020, Congress passed and the President signed the CARES Act, a massive stimulus package in response to the ongoing public health and economic crisis caused by the COVID-19 pandemic. Among the many provisions included in the bill, there are several relating to retirement plans. This article provides a quick summary of these provisions.
Many corporate defined benefit pension plans utilize interest rate derivatives and/or Treasury STRIPS to manage interest rate risk. They also typically have large allocations to active fixed income managers as part of their liability-matching bond portfolios. Conversely, many plans invest in passive equity strategies as they do not believe that alpha can be reliably obtained by long-only equity managers.
The Pension Benefit Guaranty Corporation (PBGC) has announced the2020 Plan Year premium rates. This announcement reminds plan sponsors that providing the same pension benefits continues to be more and more expensive, especially if they maintain underfunded liabilities. Luckily, sponsors can implement a number of Simply Smarter SolutionsTM to mitigate this increased cost burden.
Interest rates can move pension funded status up or down significantly. An interest rate collar can protect funded status against a decline in rates, while rate increases can still improve funded status.
Most sponsors of corporate pension plans are familiar with their risk being asymmetric: they only benefit to a point if a plan’s funding level improves, but are on the hook for all underfunding if it does not. This recognition of asymmetry has led to a large increase in plans adopting Liability Driven Investing (LDI) frameworks.
Equity returns of 15% or higher would usually be cause for celebration among corporate pension plan investors. However, despite these strong returns, many plan sponsors have seen a decline in their funded ratios during 2019. This is mainly attributable to falling interest rates, causing the value of liabilities to increase faster than assets for many. This is a continuation of a frustrating cycle that plan sponsors are all too familiar with: strong equity returns offset by rapidly rising liability values.
On August 8th, former pension plan participants filed a lawsuit aimed at both the retirement committee of the plan sponsor, Community Health Systems, Inc., and the target date provider, Principal Global Investors, LLC, among other Principal entities. This lawsuit highlights the need for plan sponsors to review their passive index funds on a regular basis.
PBGC premiums for 2019 are coming due soon, and there are two options to determine the interest rate used when calculating a plan’s premium based on underfunding. One option will reduce the premium this year, but at the likely cost of a higher premium next year.
Is holding less equity as a plan gets closer to its funding goal the right thing to do? We decided to dig into this question to see what the potential outcomes could be for plan sponsors and see how what we call structured equity could factor into the answer.
Double Digit Equity Returns 2019 YTD — how do you protect your equity position for the rest of the year?
With both international and US equity markets up approximately 15% year-to-date reversing most of the 4th quarter 2018 correction, many plan sponsors are asking themselves “should we consider any changes to protect the equity gains that we have…