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Posts from the ‘Defined Benefit’ Category

The Billion-Dollar Question

Everybody loves cheap money, right?  Well, if you’re a borrower, you’ve definitely benefited from actions taken by the Federal Reserve to keep interest rates at record lows.

But not everyone is thrilled with this wave of cheap money. Sponsors of defined benefit plans, in particular, have dealt with surging plan liabilities due to low interest rates.

As you can see from the chart, there has been a steady downward slide in the interest rates used to determine plan liabilities on corporate pension plans.

The Principal Financial Group, April 15 2013, Accounting Discount Rates based on yield curve of pension plans with services by Principal Life Insurance Company between January 2008 through January 2013

The Principal Financial Group, April 15 2013, Accounting Discount Rates based on yield curve of pension plans with services by Principal Life Insurance Company between January 2008 through January 2013

In fact, despite the fact that employers contributed more than $45 billion to their pension plans in 2012, pension deficits still increased by a whopping 17% to $295.2 billion by the end of 2012[1]

This begs the billion-dollar question: When will interest rates go back up?

Unfortunately, considering all of the factors that can affect interest rates—Federal Reserve policy, economic conditions and inflation, to name a few—their movement is impossible to predict.

So what’s a sponsor of a DB plan to do? Keep these considerations in mind:

  • Rates may stay low for an extended period of time. This is especially important to plan sponsors who are waiting until interest rates rise before employing a risk management strategy, including the purchase of long-duration bonds.
  • Once rates do start to rise, they’ll likely do so at a slow, steady rate.  A gradual increase in rates would temper the market losses associated with bond funds.
  • The funding relief afforded to plan sponsors by the Moving Ahead for Progress in the 21st Century Act (MAP-21) legislation will, once expired, have an impact on most plans. Minimum funding requirements have been artificially lowered for most plans compared to what they’ll be under the full Pension Protection Action legislative impact.  Plan sponsors should be considering steps to take now to plan for increased contribution levels.
  • Don’t try to time the market. After a careful analysis of their options and evaluation of their risk tolerance, plan sponsors should consider a strategy that best allows them to be comfortable in a variety of market conditions.

My suggestion is to determine your strategy now. For example, a dynamic asset allocation strategy,  could help you take advantage of changes in both interest rates and equity market performance. So even though you can’t know when interest rates will begin to rise, you’ll feel prepared for the day it happens.

 

In addition to blogging here, I also tweet regularly about DB topics of interest. Click to follow me on Twitter- @scottruba.

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Affiliation Disclosures

Asset allocation/diversification does not guarantee a profit or protect against a loss. Use of DAA and/or any glide path does not guarantee improvement in plan funding status nor the timing of any improvement.

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

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[1] “Analysis: Pension Deficits Rise Again,” Employee Benefit News, April 23, 2013

 

 

 

Global domination!!

Does anyone remember the classic board game Risk? I had a good childhood friend who loved to play this game. It required a lot of patience, strategy and a good sense of timing – I could never get the hang of it. (Then Atari came along – forget about it!)

Fast forward 30 years. In the course of writing this blog, I’ve had many discussions with actuary friends. Time and time again, these same themes keep popping up: de-risking tactics take time to develop, a careful strategy must be employed and timing of your action can greatly impact the results.

I’m sure these guys would have dominated me at Risk.

In an earlier post, Helping DB Plan Sponsors Sleep at NightI discussed several ways in which DB plan sponsors can manage their risk.  Below, I’ll provide more detail on each option. You can see that patience, strategy and timing all come into play. Read more

Coming to Your Emotional Rescue

I know what you’re thinking. First Kenny Rogers and now the Rolling Stones? Why does this guy keep quoting 1980s songs and relating them to defined benefit (DB) plans?  HZ1370

Well, there were two things I did during my summer nights as a teenager growing up in the ’80s that left a lifelong impact on me – listening to music and dreaming about DB plans. Didn’t we all? More on this later….

Anyway, in my last post, I introduced the idea of dynamic asset allocation (DAA) as a DB plan risk management strategy. This strategy works particularly well with hard frozen DB plans.

Read more

The Kenny Rogers of Pension Plans

What does Kenny Rogers have to do with pension plans? Well, nothing really. But as I sat down to write my LDI blog post, I thought about how many plan sponsors gamble with their pension plan investments.

As I mentioned in earlier posts, the behavior of the stock market has little to do with the way a defined benefit (DB) plan’s liabilities react. Yet many DB plan sponsors make big bets by allocating a large portion of their plan portfolios to stocks— without considering plan liabilities. (After all, “You’ve got to know when to hold ’em, know when to fold ’em.”) You’ve got to know when to hold ’em, know when to fold ’em. Read more

DB or not DB?

DB or not DB?  That is the question!

HZ1355

Okay, I’m no poet, but if I were, I might want to adapt the iconic line “To be or not to be” from William Shakespeare’s Hamlet to open the first scene of my defined benefit (DB) play. (I wonder if any of my actuary friends can act? Probably not!)

I want to discuss a topic many companies are struggling with today – whether or not to continue to sponsor their DB plan. In other words “DB or not DB”?

Read more

Helping DB Plan Sponsors Sleep at Night

In my previous blog, I talked about risk as it relates to managing a defined benefit (DB) pension plan. The long and short of it is that risk is what happens when DB plan sponsors are busy making other assumptions.

Today, the combination of several factors—including market volatility, low interest rates and recent legislation—has created significant challenges for DB plan sponsors. Fortunately, the pension industry is helping plan sponsors manage these risks with a number of innovative approaches.HZ1349

Read more

The Best-Laid Plans Are Nice and Then…

Sponsors of defined benefit (DB) plans face big challenges. These challenges usually happen when business (like life) doesn’t quite go as planned.

HZ1348 Read more