good news for big pension
The funded status of a defined benefit plan is often cited as an indication of the plan’s financial health and there is good news on that score for most major US plans. A report by Willis Towers Watson shows that the estimated total funded position of 361 Fortune 1000 companies has improved to 96% at the end of 2021. This is the highest level since 2007 and an increase of five percentage points from 2020. The analysis also found funding. The deficit is projected to be $63 billion at the end of 2021, significantly lower than the $232 billion deficit at the end of 2020. Pension liability declined 8% from $1.89 trillion at the end of 2020 to an estimated $1.74 trillion at the end of 2021.
According to Jennifer Lewis, Senior Director- Retirement with Willis Towers Watson, the main drivers of improving funded position in 2021 were increasing interest rates used to determine plan obligations and strong investment returns. According to the analysis, pension plan assets increased slightly (1%) in 2021 to $1.67 trillion at the end of the year. Overall investment returns are projected to average 8.9% in 2021, although returns vary by asset class. Domestic large-cap equities rose 29%, while domestic small/mid-cap equities saw a rise of 18%. Overall bonds recognized losses of -2%, while long corporate and long government bonds, commonly used in liability-driven investment strategies, realized losses of -1% and -5%, respectively. Other factors: A record year in pension risk transfers and less than average cash contributions limited asset growth.
Positive factors may not provide the same boost in 2022, notes Lewis: “In the first two months of 2022, economic factors have moved in opposite directions. Interest rates have continued to rise, while equity returns were negative or near zero. Political and macroeconomic factors may weigh heavily on the results in the near future.”
As noted in the report, pension risk transfer had a record year. One possible consequence of their better funded position is that more plans will consider these transfers to offload part or all of their plan liabilities. “We expect that some plan sponsors who have better positioned their plans to face market risk will continue to proceed with planned actions,” Lewis says. “This includes certain stalled plans that are considering or executing full plan termination.”
Not so good news for DC plans
On March 1, the Workplace Solutions group of Morningstar Investment Management LLC, a subsidiary of Morningstar, announced the formation of the Morningstar Center for Retirement and Policy Studies. center first digit abbreviated, Retirement Planning Landscape Report by Aaron Szapiro and Lia Mitchell, examined four aspects of the American retirement system, including: trends in coverage, assets, and the number of defined-contribution plans; the costs of workers and retirees under these plans, as well as their investments; The types of investments made by these schemes; and the continuing role of defined-benefit plans for today’s retirees.
The report highlights several key findings:
- Defined contribution plans saw an outflow of $4.61 trillion from 2011 to 2020. These outflows, which the authors believe are most likely due to rollovers and cash-outs, reduce the plan’s assets, which in turn leads to higher asset management fees and lower returns. Attendees.
- Plan costs vary widely, with some participants in smaller plans paying nearly twice as much as participants in larger plans. The authors note that “these differences in fees can add up, leaving participants with less assets at retirement and less ability to achieve their retirement goals.”
- Planning sponsors appear to shy away from considering environmental, social and governance (ESG) information and analysis, partly because of regulatory uncertainty. The report argues that this avoidance has exposed the US DC system to greater ESG risk, which is “the degree to which companies fail to manage ESG risks, potentially jeopardizing their long-term economic value.” ” Author’s advice: Plan sponsors may re-examine their investment options using the ESG lens.
Given the success of 401(k) plans replacing DB plans, at least partially, I suspect many of us take an optimistic view on the American retirement system. But the authors believe that optimism may be misplaced. According to the report: “At first glance, the US retirement system appears to be stable, but this obscures the fragility of the system that loses thousands of plans and billions of assets each year. … many from a few years of poor returns.” The assets of the schemes, their market power and thus their ability to offer institutionally priced investment options will be reduced.
It’s not the most exciting news, but it’s a well-documented, thought-provoking report worth reading.