The Society of Actuaries (SOA) published new mortality base tables and a new mortality improvement scale in late October. These new releases are likely to result in relatively small changes to plan sponsor income statements and balance sheets, and will most likely start to impact minimum contribution requirements in 2021; in most cases, these small changes will be favorable to plan sponsors.
Despite the Fed lowering rates in October, long-term corporate bond yields stayed relatively flat for the month. At the same time because of a relative calm on the geopolitical front, equity returns posted a decent month led by international and emerging market stocks. When taken together, most plans that have some return seeking assets in their portfolio would have seen funded status increases over the month.
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.
River and Mercantile Solutions (R&M) announced that Michael Clark, Managing Director and Consulting Actuary, was appointed President of the Conference of Consulting Actuaries (CCA), effective October 30th. In this role, he will provide continued direction on the CCA’s strategic plan and continue to provide leadership on the CCA’s board of directors.
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.
Long term interest rates saw some of the steepest rises in recent memory in early September, with the 10 year US Treasury yield rising ~30bps in a few days. This increase was not fully sustained for the rest of the month but discount rates did remain higher compared to their multi-year lows achieved in August.
On September 18th, River and Mercantile proudly joined a group of 230 institutional investors (representing $16.2 trillion in assets under management) to sign a statement urging companies to take action against the escalating crisis of deforestation in Brazil and Bolivia.
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.
For the fifth consecutive quarter, total pension buyout sales surpassed $4.7 billion. This is down 42% compared to Q2 2018 when FedEx completed a $6 billion transaction. However, a total of 112 buyout contracts were sold in Q2, bringing 2019 sales to 190 contracts, an increase of 32 compared to first half 2018. Total 2019 sales are estimated to surpass $25.5B, which could end up being less than the total sales from 2018.