Editor’s Note: This is the third in a three-part series on pension funding. It features discussions with Brad Smith, partner at NEPC investment and advisory firm and member of its defined benefit team. The first installment is here; the second is here; this one examines the trends and what lies ahead.
What has been the overall trend in pension funding for private sector defined benefit plans over the period 2011-2021? “The general trend over the past decade is that plan sponsors have continued to refine their investment strategy and overall have significantly improved their funding,” said Smith. “Over the past 10 years,” he continues, “while we haven’t seen an increase in LTD adoption, we’ve seen plan sponsors follow their downward trajectory and increase securities assets. fixed income.
Smith notes that returns on U.S. stocks in the first eight months of the year were 21.6%, according to the S&P 500, while returns on long credits were -0.7%, according to Bloomberg Barclays. Long Credit. He said these results indicate that plan liabilities declined – using long credit yields as an indicator – and yield-seeking assets improved – using the S&P 500 as an indicator – which he said , “Led to an improvement in capitalization as assets improved and liabilities declined.” ”
“In the NEPC Defined Benefit Plan Trends Survey, 87% of plans using LDIs and descent paths reported having hit a trigger on their descent path since January 2021,” Smith said. “Of those shots that did hit a trigger, 89% said it was due to market movements.”
Beyond the increase in the number of plans with more than 100% funding, what has been the trend in pension funding? Smith responds, “We have seen two notable trends with well-funded plans. First, we continue to see frozen plans with funding status above 100% reducing the risk of their portfolios to lock in funding gains. Second, we’ve also seen plan sponsors make voluntary contributions to ensure plans stay above 100% to avoid variable rate PPBGC premiums.
And how are the improvements in funding status distributed? Is there a difference between close-ups and small shots? Overall, according to Smith, the funding situation has improved over the past two years for large plans – which the NEPC defines as a plan with assets over $ 1 billion – and small plans. , which the NEPC defines as a regime with assets of less than $ 1 billion. But small plans actually saw the largest percentage increase, a 17% jump for funding status above 101%.
Smith says NEPC expects that over the next 10 years, private sector DB plan sponsors will continue to manage them according to their unique goals and objectives. Some plan sponsors will seek to maximize risk-adjusted returns while others will seek to minimize funding volatility.
Smith notes that the NEPC expects the majority of open plans to remain open, and notes that 63% of open plans said they expected to remain open in their 2019 survey. The most frequently expressed reason why these plans expect to stay open, he says, “is because they believe the risks of contribution volatility and funding status are currently being managed.” Smith adds that the NEPC also expects the frozen plans to implement more risk management strategies such as hibernation strategies and / or opportunistic risk reduction strategies, such as lump sum payments and retirement risk transfers.