By Steve Richards
With the 10-year Treasury yield hitting an all time low on Tuesday it seems a good time to reflect on the impact of such low yields on DB plan de-risking and terminations.
The efficacy and timing of de-risking moves basically comes down to where one thinks interest rates are going. The conventional wisdom for years now is that rates are heading up, and most think that pulling the trigger on buying annuities and/or offering lump sums is just not a good idea. Why? Because as rates go up the price of Single Premium Group Annuities (SPGAs) go down. Likewise, the cost of lump sums.
Obviously, this conventional wisdom has largely proved wrong.
What’s worse is that these could be the good old days when plan sponsors will look back and say to themselves: “Boy, I sure wish we had made those de-risking moves way back when…” Especially if equity markets tank, always a risk.
10-Yr Treasuries vs FTSE Pension Liability Index vs 10-Yr Bund Since 2010
Welcome to ,CES-CREWS' new blog on the fascinating world of DB plan de-risking and termination trends.
Just who needs that you might be saying?
Well, our blog is uncommonly interested in a point-of-view which is often lacking in this area: the participants. Not that we aren’t interested in the plan sponsor – quite the opposite. But plan sponsors generally have a phalanx of advisers available to them and no shortage of analyses to read about themselves. Participants? Not so much.
By Steve Richards
One might think DB plan sponsors looking to terminate their frozen plans are feeling increasingly sanguine after a great year of stock market performance. However, the funded status of plans has barely budged over the last year with the Milliman index increasing a scant .3% to 84.1% from 83.8% since the beginning of 2017. This would seem to beg the question: If you can’t get ahead with a raging stock market, how are things going to look if things go south? This is the essence of de-risking and why many plan sponsors are planning to terminate, or at least take a big chunk out of their risk profile through partial buyouts.
By Michael Lee
On October 3, 2017 the Department of Treasury and IRS released final regulations on the mortality tables plan sponsors must use beginning in 2018 for defined benefit plans, per the Pension Protection Act of 2006. These tables are to be used to determine funding requirements, lump sum calculations and other acceleration of benefit calculations. On October of 2014, the tables were released in two reports released by the Society of Actuaries (SOA), the RP-2014 Mortality Tables Report and the Mortality Improvement Scale MP-2014 Report. Each of these reports contained new mortality assumptions recommended for valuing private-sector pension liabilities.
Interest rates are key to deciding upon de-risking moves as they drive the liabilities, lump sums, the cost of annuities, the value of fixed income assets, and the cost of financing. Such transactions always seem to come down to interest rates.
Generally speaking, as interest rates increase, liabilities are driven lower – and the cost of lump sums and annuities decrease. So, other things remaining the same (which they never do, of course), firms tend to wait for rates to move higher if they are anticipating de-risking moves.