Retirement Update – March 2019
- Discount rates were relatively stable. February was a quieter month for bond markets following prior volatility in both US Treasury yields and corporate bond yields.
- Equities rose as markets continued to look beyond recent concerns about rising Fed rates and global trade wars.
- Funded status likely improved during February on the back of strong equity markets.
- IRS announces that cash lump sums may be paid to pensioners, following removal of this option in 2015.
March 6th 2019
In 2015, the IRS put a stop to the practice of plan sponsors strategically offering lump sums to individuals within a qualified defined benefit plan who had already started receiving an annuity (i.e. retirees and beneficiaries). At the time, the Treasury Department and IRS announced via IRS Notice 2015-49 that they would propose amendments to regulations to formally address this practice. This week, the Treasury Department and IRS have reversed course and announced via IRS Notice 2019-18 that they no longer intend to amend regulations for this purpose, effectively reopening this strategy for plan sponsors.
While this strategy resulted in cost savings for certain plans a few years ago, it was not for all plans, due to other negative implications. Since 2015 there have been other changes around lump sum calculations (e.g. mortality updates) that increase the relative cost of retiree lump sums. River and Mercantile is currently evaluating all aspects of this strategy and will publish our thoughts in the near future.
February 2019 Summary
2019 continues positively for the vast majority of pension plans. Equities added to January’s strong returns, with US equities up +3.5% and international equities up +2.5%. Global equity markets have now made up all of December’s losses. Typical discount rates rose by a small amount. A rise in long US Treasury yields was offset by narrowing credit spreads.
Discount Rates & Asset Returns
In February, discount rates increased 0.05%, breaking the declining trend of the past few months. Current rates are still down 0.10% since year end 2018 but are 0.10% higher than rates from this time last year.
Global equity markets increased in February. The US led the equity markets with a 3.5% return while international developed markets increased by 2.5%, and emerging market equities by 0.2%. Interest rates increased and credit spreads narrowed, providing for positive returns in high yield bonds and negative returns in less risky fixed income sectors.
What’s New at R&M?
R&M Give a C+ to 2018 in this year’s Pension Plan Report Card
2018 was a so-so year, at best, for most plan sponsors. For most of the year things looked good but by the end of 2018 there were few things to celebrate. The good news was that interest rates were up year-over-year, but, in December, rates gave up some of the year’s increases and the claw back continued into the first few weeks of 2019.
Q: Our plan is contemplating a termination in the next few years with an insurance company. Is this a safe option for our participants ?
A: The insurance companies that participate in the annuity market are highly regulated and well capitalized, making the probability of their failure very low. That said, any company has the possibility of failure, so it is important when undertaking an annuity placement with an insurer to complete due diligence of that insurer’s credit worthiness and to also understand what participants could be left with in the unlikely event of the failure of the insurer. Upon such a failure, the most likely outcome would be for benefits to continue to be paid from the assets the insurer holds. It is also possible that the obligations would be taken over and paid in full by another insurer. Ultimately, a state guarantee system exists which ensures policyholders receive the full value of their benefits up to certain limits (typically $250,000) but it is always possible that some participants could lose a fraction of their benefits in an adverse scenario. However, plan fiduciaries should be aware that moving benefits to an insurer, backed by the state guarantee safety net, is likely to be a safer option for participants compared to remaining in the pension plan, with benefits guaranteed to PBGC levels.
Have a question for R&M? Please submit it to firstname.lastname@example.org and look for a possible answer in next month’s update!
SECURITY INDICES: This presentation includes data related to the performance of various securities indices. The performance of securities indices is not subject to fees and expenses associated. Investments cannot be made directly in the indices. The information provided herein has been obtained from sources which River and Mercantile LLC believes to be reasonably reliable but cannot guarantee its accuracy or completeness.
CONFIDENTIAL: For addressee use only, not to be disclosed to any other person without express consent from River and Mercantile LLC. Past performance cannot be relied upon to predict future results. River and Mercantile LLC is an investment advisor registered with the US Securities and Exchange Commission.
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