Retirement Plan Sponsors
As an experienced advisor, we stand ready to guide Plan Sponsors through the complexities and everchanging landscape of pension plans. This newsletter provides valuable updates from our dedicated Defined Benefit Business Council.
The Federal Reserve kicked off their easing cycle with a larger than expected 50 basis point cut to the Fed Funds rate in late September. Markets have applauded the size of the cut, and strong performance has continued as the Fed looks to pull off the elusive “soft landing.”1
Insights From Your Trusted Team
Traditional Pension Plans
The FTSE Pension Discount Rate decreased by 43 basis points (-0.43%) during the quarter, ending September at 4.92%. The rate is up 9 basis points (+0.09%) this year, resulting in overall lower liability valuations.2
Strong performance from both the equity and fixed income markets for the quarter helped offset the decrease in the Pension Discount Rate, largely keeping funded status in check. Year-to-date, funded status has seen meaningful improvement given the slight uptick in rates and robust market performance.
Despite the rate cut, longer term interest rates have moved higher thus far in October, which should be a tail wind for Plan Sponsors when evaluating their plan’s liabilities.
Pension Risk Transfer and Plan Termination
Total pension risk transfer (PRT) sales were $45.4 billion in 2023. While this was down 13% from the record set in 2022, it is the second highest annual total on record.3
LIMRA estimates that the PRT market totaled $26 billion in 1H2024, up 15% from last year and the largest 1H on record. They note that 66% of transactions were complete plan terminations, up from 54% in 2023. With 21 insurers now in the marketplace, pricing and capacity remain attractive for Plan Sponsors wishing to pursue this route.4
With significant improvements in plans’ funded statuses during the past few years, we expect to continue to see robust de-risking activity through 2025.
Litigation Update
2024 has seen lawsuits brought against defined benefit Plan Sponsors focusing on the fiduciary obligation in pension risk transfer transactions to select the “safest available annuity provider”.
These lawsuits have focused on Athene Life & Annuity, a wholly owned subsidiary of private equity giant Apollo Global Management and the leading seller of annuities in recent history, completing 48 deals worth $52.3B through the first half of 2024.5
Plaintiffs have claimed that Plan Sponsors violated their fiduciary duties by selecting Athene which they believe is more risky than other annuity providers due to its private-equity controlled, offshore structure.
Athene-related suits in 2024 have been brought against AT&T, GE, Bristol-Meyers Squibb, Lockheed Martin and Alcoa among others.6
Public Pension Plans7
Strong capital market performance increased the estimated aggregate funded ratio for state and local plans to 80.6% as of June 30, 2024, according to the Equable Institute Annual Report State of Pensions 2024. The funded status is notably higher than was reported in 2023 (75.8%).
The long-standing trend of public pension plans gradually reducing their investment return assumptions seems to have come to an end thanks to the restoration of higher bond yields and changes to actuarial assumptions (i.e., new mortality tables). All else being equal, a lower investment return assumption results in higher actuarial liability and Actuarially Determined Employer Contribution (ADEC), and a lower funded ratio.
Cash Balance Plans
One of the most significant recent developments within the pension landscape was likely IBM’s announcement that they were re-opening their pension plan as a substitution for their 401(k) plan match8. In so doing, IBM will use the surplus assets in their overfunded pension plan to reduce contributions that formerly would have gone to participants’ 401(k) plan accounts. IBM’s actions highlight that plan termination is not the only route for Plan Sponsors that find themselves in the enviable position of having surplus assets.
IBM re-opened their pension plan via a cash balance plan formula, which helps to mitigate volatility that plagues traditional pensions.
Sources:
1What to know about the Fed’s interest rate cuts, Penn Today, September 2024
2ftse-pension-discount-curve.xlsx (live.com)
4Legal & General Pension Risk Transfer Monitor, September 2024
7The Equable Institute Annual Report State of Pensions 2024
8How IBM reopened its DB plan to replace 401(k) contributions, Russell Investments, November 2023
