Perspectives

Since the 2010s, much has changed with respect to U.S. single-employer defined benefit (DB) plans: plan sponsors are at the highest funding levels seen in decades; a focus on funded status volatility and risk reduction has taken center stage; and changes in regulation allow sponsors greater funding flexibility. Given these changes, it is worth reassessing the value of the pension…

It has been approximately four years since the passage of the American Rescue Plan Act (ARPA) legislation, which contained a Special Financial Assistance (SFA) provision for certain multiemployer plans.[1] This landmark bill provided the opportunity for financially troubled plans to apply to the Pension Benefit Guaranty Corporation (PBGC) for funding relief. Since this December marks the deadline for an initial…

Bundled LDI seeks to deliver the features of a custom-tailored liability hedging strategy with the simplicity of an all-in-one turnkey structure.

Prompted by recent funded status shock experienced by some pension plans that offer lump sums, as well as new IRS regulations regarding plan provision changes, we look at modifications that could better align reality with expectation.

For multi-employer plans yet to receive Special Financial Assistance, it is possible to use the assets you will have tomorrow with the assets you have today. 

Partial annuity buyout transactions (PRTs) inherently pit two groups of participants against one another – those in the transaction and those remaining within the plan. Fortunately, publicly available bond market data can help measure the potential harm to each group.

This post examines whether our market-based measure, and the resulting Economic Loss to Beneficiaries (ELB), is materially impacted by the size and liquidity of the insurer bond market.

To paraphrase Tolstoy,[1] market ascents resemble one another, but each swoon is unique in its own way. Above-trend inflation, record Fed tightening and the invasion of Ukraine all conspired to deliver the worst year for financial assets in more than a generation in 2022 (see Figure 1). Can we learn anything from a year as unusual as 2022, or should…

A new analysis of the Final SFA Rule shows that plans receiving ARPA relief could surpass goals. When the Special Financial Assistance (SFA) provisions were originally published in 2021 by the PBGC as Interim Final Rules, it seemed unlikely eligible multiemployer plans would achieve the intended goal of maintaining solvency through 2051. However, with the recently published Final Rule, our…

Year-end is often accompanied by an uptick in Pension Risk Transfer (PRT) transactions. Accordingly, we are updating our estimates of the potential ELP associated with commonly used insurers based on current (10/31/22) market pricing. We developed this methodology to aid fiduciaries who are responsible for choosing an insurer as part of PRT transactions. Our ELP formula uses a market-based approach…

As most plan sponsors are well aware, the rapid increase in interest rates year-to-date has significantly reduced the size of their defined benefit pension liability. The discount rate for an illustrative liability with a duration of 12 years increased from 2.71% (12/31/21) to 5.61% (10/31/22), resulting in a 28% reduction in the size of the liability in 2022 so far.[1]…

Economic analysis reveals a 14% range in credit risk costs among nine Pension Risk Transfer (PRT) insurance providers.  A pensioner’s benefit is fixed – they are not compensated for bearing the risk of lower quality insurers. With annual PRT transactions of approximately $40b, the disparity puts pensioners at risk of losing as much as $5b per year in the form…

The Update In October, the Society of Actuaries (SOA) released mortality Scale MP-2021, giving us another opportunity to quickly reflect on the impact of mortality assumptions on pension valuation and management. For all points on this chart, we have modified our own input assumptions since our last SOA mortality scale update post to assume a 50/50 blend of male/female accrued…

NISA is excited to announce a collaborative effort with Club Vita to help plan sponsors get a better assessment of the impact of mortality assumptions on their pension plans. A formal press release on this will be issued in the next few days. This effort leverages the data and mortality analytics developed by Club Vita to allow NISA to perform…

Executive Summary On Friday, July 9th, the PBGC released the interim final rules regarding the multiemployer Special Financial Assistance (SFA) program pursuant to the American Rescue Plan Act of 2021. As mentioned in a previous publication, the program provides much needed relief to multiemployer plans and provides greater benefit certainty for plan participants for years to come. For now, the…

Increased funded status, newly legislated funding relief and historical contribution credit balances have created clearer skies and calmer waters for plan sponsors as we look forward over the next several years – from a contribution perspective. What a difference a year makes. On March 31, 2020, the average corporate pension plan’s funded status stood at 85%.[1] One year later, the…

Executive Summary The Special Financial Assistance (SFA) provisions of Sec. 9704 of the American Rescue Plan Act of 2021 (ARPA) provides a needed lifeline to many multiemployer plans facing insolvency in the coming decade. Eligible multiemployer plans will be able to apply for direct financial relief in the form of a single lump sum payment from the PBGC. The exact impact of…

NISA has consistently argued that risk assets play a useful role in end-state/hibernation portfolios, in moderation. While every hibernation portfolio needs to be designed based on its specific circumstances, a reasonable starting point to consider would be a portfolio comprised of 20% return seeking assets and 80% hedge assets – more specifically, 20% equity, 50% corporates and 30% Treasuries, designed…

Earlier this year, a change occurred with respect to fixed income security pricing that many service providers in the industry (e.g., custodians, recordkeepers, etc.) considered a relative non-event. However, the change actually has significant implications for managing fixed income against a chosen benchmark, portfolio valuation and manager evaluation. Specifically, on January 14th, Bloomberg Barclays changed the time at which it…

A few clients have asked us recently for our thoughts regarding the potential for additional funding relief for single-employer DB plans. While we certainly aren’t Washington insiders, our common reaction was that we did indeed expect relief because 1) relief provided under prior legislation is scheduled to begin phasing out this year, 2) rates are even lower now than they…

Around the office, we have found longevity to be an engaging topic. A conversation about expected lifespans can quickly attract a small gathering of people observing and participating in the dialogue. Why? One answer is that it could be very primal – people are genetically programmed to think about survival, how long they might live, and what factors influence their…

Very little currently could be described as “normal,” but curiously (and perhaps surprisingly) we think interest rates have made the very short list of all things normal in 2020. In a recent Webinar, we discussed various market-based assessments of the potential future direction of interest rates. The data presented that received perhaps the most attention was the implied distribution of…

When volatility increases for a particular market (e.g., interest rates, credit spreads, or equity), the potential pain felt by the wrong move or satisfaction felt by the right move can be amplified. Over the last few months we have seen risk increase across a multitude of markets. Our last piece “Are Static Hedge Ratios Really Static?” focused exclusively on how…

While the COVID-19 crisis is certainly new for everyone, heightened volatility, a declining equity market, falling rates and widening credit spreads are not.  So although funded status has fallen this time around, as compared to the Global Financial Crisis (GFC), plans have been better positioned to weather the storm. The NISA PSRX index is structured to estimate the average funded…

Authors’ note: The timing of this piece may seem curious in these crazy times – specifically, a post that explores how “bond math” leads to increasing interest rate exposures in a low rate environment. We aren’t sure which reason is more appropriate to describe the timing; the fact that we started on this idea before the recent crisis or that…

I know this is not the time for a long note on rebalancing theory and best practices. That said, current market conditions will make upcoming rebalancing challenging and expensive – maybe more so than at any time in memory. So here are the cold, hard facts. Each point has further detail below if you would like more details. Transaction costs in…

For the fifth year in a row, the updated Society of Actuaries mortality tables have reduced the size of pension liabilities: While this short note is becoming a little repetitive (as evidenced by our Groundhog Day movie reference from last year), it provides a good opportunity to highlight some key points about longevity. What can we conclude from the new…

Many plan sponsors find themselves in the fortunate position of approaching the end of their plan’s glidepath. Favorable market conditions and a contribution nudge from tax reform have made the end state appear on the horizon. This proximity to the finish line is certainly welcome and we expect plans are giving additional thought to what the end-state portfolio will look…

Perhaps it would have been more fitting if the Society of Actuaries published their updated pension mortality improvement scale, MP-2018, on February 2. (For readers unfamiliar with the 1993 movie, Phil (Bill Murray) is stuck in a time loop, reliving one particular day – Groundhog Day.) By our estimates, the updated tables reduce the typical pension plan liability by about…

Small balance annuity buyouts have been increasingly popular in the last few years – and for good reason. Given the fixed PBGC premium1 charged per participant, these participants represent the most costly balances for a sponsor to carry2. NISA’s position on annuity purchases has long been that they are better suited to serve cost management objectives than risk management objectives. Accordingly,…

Annuity Buyout In recent weeks we have read a handful of commentaries suggesting that pension plans should take advantage of a “window of opportunity” to complete annuity purchases with insurance companies. They argue that plan sponsors should increase annuity purchases and offer lump sums and even consider fully terminating their pension plans. The unifying theme of these commentaries is that…

‘Tis the season for both giving and receiving, and for pension plans it’s been an especially great season for receiving. Since the beginning of the year, equity returns are up 15-25% and the average pension plan’s funded status is up 4-5%.1 At the risk of sounding like Scrooge, however, we wanted to highlight a small wrinkle in the liability discount rate…

Sometimes you come across a piece of analysis that is interesting enough to feel compelled to pass it on. I had this reaction while reading AQR’s recently published paper titled “The Illusion of Active Fixed Income Diversification,” which examined the excess returns of active bond managers and concluded that a majority of managers may be simply overweighting credit to produce alpha. Perhaps…

Summary We examined the statistics behind the claim that large pensions drag down a company’s valuation and accordingly how annuity buyouts allow a sponsor to remove this discount from their stock price. As you might have guessed, this conclusion rests on some erroneous assumptions and interpretations, and what makes for an exciting graph doesn’t quite translate into the real world…

Summary In recent months we’ve observed that equity’s effective spread duration (ESD) seems especially pronounced—for example, the S&P 500’s ESD is currently about 25 years vs. its ten-year average of about 15 years. We thought it would be worthwhile to dig a little deeper to understand this dynamic. In a nutshell, below average spread volatilities and above average correlations between…

The ongoing equity rally and the rise in Treasury yields prompted us to revisit this analysis. Between yesterday’s close (December 1) and November 10, when we originally calculated these estimates, the yield of the 30-year Treasury increased 15 bps while the MSCI ACWI climbed 0.3% higher. As a consequence, plan sponsors have likely continued to experience additional funded status gains…

It has been an interesting week. Regardless of your political leanings, Tuesday’s election seems to have already produced another unlikely winner: defined benefit plan sponsors. Between last Friday and yesterday (November 10), the yield on the 30-year Treasury increased 38 bps while the MSCI ACWI jumped 2.2%. This increase in rates and equity prices has boosted funded status, and some…

Last week, we participated in the annual P&I Pension Settlements Strategies conference. We will share the full materials in an upcoming post, but I thought one exhibit was worthy of special attention. One key point in our presentation was that pensions are not inherently risky. Rather, asset allocation drives the risk profile of the pension plan. Perhaps not an earth-shattering…

I received some feedback asking whether the high correlation of managers both to beta and to each other applies to “Aggregate” managers as well. As a brief follow-up to the previous post, I thought I would share results we obtained from the eVestment Analytics database of managers benchmarked to the Barclays Aggregate index. The bottom-line: Aggregate managers are even more…

It should surprise no one that many active fixed income managers tend to have systematic beta exposure—meaning, they tend to perform well when the overall credit market does well, and underperform when it doesn’t. For Long Government/Credit managers, the likely explanation for this relationship is that most managers consistently overweight credit. As a result, they receive the extra return in…

Since the New Year is always a time for reflection, and we are pension geeks, we thought it would be interesting to take a look at how the biggest defined benefit corporate plan sponsors have shifted their plan allocations over the last decade. Using company filing data gathered for our Pension Surplus Risk Index, we can obtain a high-level estimate…

Working in the pension industry, it can be confusing to know which side to root for when new longevity projections come out. And when the Society of Actuaries released new mortality projections in October1 that predicted lower life expectancies than previously indicated, our reaction was decidedly mixed. While as human beings hoping to live to a ripe old age this…

We hear annuity buyouts frequently discussed as a silver bullet to reduce pension plan risk. Whether buyouts are the right de-risking option was the main topic at the October Pension & Investments’ Pension Settlements Strategies Conference , which we cosponsored for the third year in a row. Judging by the interest we saw at the conference, plan sponsors are engaged…

Finding the Right Corporate Bond Allocation with LDI Hibernation When de-risking with liability driven investing, pension plans must decide on the right blend of corporate bonds and Treasuries to hedge their liabilities. We look at the forces that can drive this decision and find that the mix of hedging bonds depends on changing market conditions. Plans should periodically examine their…

How Actuarial Assumptions Cloud Perceptions of Annuity Buyout Pricing Recent annuity purchases highlight the need to examine what drives their pricing. Plan sponsor announcements that allude to “par” settlements relative to accounting values warrant a closer look at the plan’s actuarial assumptions before reaching any conclusions about the attractiveness of a buyout’s economics. Introduction “We’re settling the retiree obligation with…

Comparing De-Risking Strategies from a Contribution Perspective LDI hibernation strategies may present an opportunity to de-risk at a lower expected cost and on a more flexible contribution schedule than annuity buyouts. Additionally, plans that have not yet de-risked may be surprised by how little their equity allocations reduce expected contributions, and how much contribution volatility they may generate. Introduction For…

Many pension plan sponsors and fiduciaries are confronting perhaps the most important decision in the plan’s life – whether to pursue an internal de-risking strategy or pay an insurer to offload the liability. We highlight some key considerations for those faced with this choice, and explore the components of the amount a sponsor may pay in a buyout transaction. Though…

Pension plans run the risk that actual beneficiary lifespans can exceed those assumed in their liability projections. We estimate the risk to be about 0.4% annually in funded status terms. While longevity risk should not be ignored and can be managed, it is small relative to the market risks embedded in a typical plan’s assets and liability. Pension plans are…

Pension de-risking need not be an all-or-nothing decision. In fact, plan fiduciaries may be surprised by the degree to which pension risk profiles can be changed – marginally or materially – through asset allocation decisions and liability-driven investment (LDI) techniques. While annuity buyouts define the end point of the so-called de-risking spectrum, fiduciaries should compare them to other “hibernation” approaches…

By simply de-risking their pension plan, companies can realize most of the benefits of annuity purchases without incurring the upfront liquidity costs or committing to an irreversible decision. Along with the reduction in pension volatility, de-risking should improve credit ratings for some companies with large pension plans relative to their core businesses. The desire to de-risk pension plans is understandable…

NISA Investment Advisors, LLC (NISA) is pleased to introduce the Pension Surplus Risk Index, or PSRX*, a forward-looking estimate of the funded status volatility of US corporate defined benefit pension plans. The index level represents a one standard deviation change in funded status over a one year horizon, based on the average of the 100 largest pension plans.1 For example,…

Introduction Market indices serve as a barometer of market segment performance and are a means by which investors can evaluate strategies. Price-based indices which measure the value and performance of financial assets have been available for over 100 years. More recently, market participants have developed volatility-based indices to measure market risks. Though lesser known, a variety of providers offer measures…

Pension plans have used a variety of Liability Driven Investment (LDI) strategies for years. While an indispensable tool in our mind, traditional LDI strategies address only the interest rate risk within the pension plan. In this brief we introduce a more comprehensive platform, Dynamic LDI. The primary improvement Dynamic LDI strategies offer stems from the dynamic relationship between funded status…