The Markets December 10, 2018

DB Plan Funded Status Shows Slight Improvement in November

An increase in liability values was offset by an increase in asset values.

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The estimated aggregate funding level of defined benefit (DB) plans sponsored by S&P 1500 companies increased by 1% in November to 91%, as a result of an increase in U.S. equity markets, according to Mercer.

As of November 30, the estimated aggregate deficit of $197 billion decreased by $11 billion as compared to $208 billion measured at the end of October.

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The S&P 500 index increased 1.79% and the MSCI EAFE index decreased 0.31% in November. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by one basis point to 4.42%.

“We saw a slight increase in pension funded status thanks to a rise in equity markets at the end of November,” says Matt McDaniel, a partner in Mercer’s US Wealth business. “We continue to see volatility in equity markets which is a concern for plan sponsors. Many plan sponsors with glide paths in place were able to lock in gains earlier this year while others may be in a tough position as market volatility has continued.”

Wilshire Consulting’s estimate of the combined assets and liabilities of corporate pension plans sponsored by S&P 500 companies with a duration in-line with the FTSE Pension Liability Index – Intermediate found the aggregate funded ratio increased by 0.7 percentage points to end the month of November at 90.3%.

The monthly change in funding resulted from a 0.3% increase in liability values, which was more than offset by a 1.0% increase in asset values. The aggregate funded ratio is up 5.7 percentage points year-to-date and up 4.5 percentage points over the trailing 12 months.

According to October Three, pension finances stabilized in November, with both model plans it tracks treading water during the month. Plan A eked out a fractional improvement in November and is now up 6% for the year, while the more conservative Plan B was unchanged last month and remains ahead by less than 1% through the first eleven months of 2018. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.

October Three says a diversified stock portfolio added more than 1% in November and is now up 1% for the year. Bonds gained close to 1% last month, as Treasury rates moved down more than 0.1% while credit spreads increased by almost as much, leaving corporate bond yields down just a couple basis points. Through November, a diversified bond portfolio is down 3% to 5%, with long duration bonds and corporates doing worst.

Corporate bond yields fell a couple basis points in November, pushing pension liabilities up less than 1%. For the year, liabilities remain down 4% to 8%, with long duration plans seeing the biggest drops.

Legal & General Investment Management America’s (LGIMA)’s Pension Solutions’ Monitor shows pension funding ratios slightly increased throughout the month of November, primarily driven by widening credit spreads and positive equity returns. These gains were somewhat offset by a decrease in Treasury rates. It estimates that the average plan’s funding ratio increased 0.7% to 90.3% during the month of November.

LGIMA estimates the discount rate’s Treasury component decreased by 11 basis points, while the credit component increased 12 basis points, resulting in a 1-basis-point increase. Overall, liabilities for the average plan decreased approximately 0.3%, while plan assets with a traditional 60/40 asset allocation increased approximately 1.1%.

According to Northern Trust Asset Management (NTAM), during the month of November, the average funded ratio for S&P 500 corporations with pension plans basically remained steady, just inching up from 88.6% to 88.7%. This was primarily driven by a slight increase in asset returns partially offset by a drop in discount rates.

NTAM says global equity markets were up approximately 1.5% during the month, and the average discount rate decreased from 4.16% to 4.13%.
Compliance December 10, 2018

9th Circuit Upholds Dismissal of Chevron Fiduciary Breach Lawsuit

The appellate court found that the allegations showed only that Chevron could have chosen different vehicles for investment that performed better during the relevant period, or sought lower fees for administration of the fund, not that any breach of ERISA duties had occurred.

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Agreeing with a federal district court that plaintiffs did not allege sufficient facts to support a plausible claim that Chevron Corporation and its defined contribution (DC) plan committee breached their Employee Retirement Income Security Act (ERISA) duties of loyalty and prudence, the 9th U.S. Circuit Court of Appeals affirmed dismissal of the lawsuit.

The proposed class action alleged that plan fiduciaries “breached their duties of loyalty and prudence by providing participants with a money market fund as a capital preservation option, instead of offering them a stable value fund; by providing retail investment options that charged higher management fees than lower-cost institutional versions of the same investments; by providing mutual funds that charged higher management fees than other lower-cost investment options such as collective trusts and separate accounts; by failing to put plan administrative services out for competitive bidding on a regular basis, and instead paying excessive administrative fees to Vanguard as recordkeeper through revenue sharing from plan investment options; and by retaining the Artisan Small Cap Value Fund as an investment option despite its underperformance compared to its benchmark, peer group, and lower-cost investment alternatives.”

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U.S. District Judge Phyllis J. Hamilton in the U.S. District Court for the Northern District of California found that the initial complaint pleaded no facts sufficient to raise a plausible inference that defendants took any of the actions alleged for the purpose of benefiting themselves or a third-party entity with connections to Chevron Corporation, at the expense of the plan participants, or that they acted under any actual or perceived conflict of interest in administering the plan. “Nor do plaintiffs in their opposition point to any facts suggesting that the plan fiduciaries engaged in self-dealing or failed to act solely in the interest of the plan’s participants, or identify any facts plaintiffs could add to state a claim for breach of the duty of loyalty,” she said.

Hamilton previously offered the plaintiffs a chance to amend their complaint, but following the filing of their second complaint, she found that they failed to correct the deficiencies in the original complaint.

Citing prior case precedent in its memorandum, the 9th Circuit said the complaint must allege “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged,” and where there are “two possible explanations, only one of which can be true and only one of which results in liability, plaintiff cannot offer allegations that are ‘merely consistent with’ [its] favored explanation but are also consistent with the alternative explanation.”

Using these standards, the appellate court found that the facts alleged are insufficient to support a plausible inference of breach of the duty of loyalty, breach of the duty of prudence, or that a prohibited transaction took place. “Rather, as to each count, the allegations showed only that Chevron could have chosen different vehicles for investment that performed better during the relevant period, or sought lower fees for administration of the fund. None of the allegations made it more plausible than not that any breach of a fiduciary duty had occurred,” the memorandum says.

The appellate court also held that the prohibited transaction claim is time-barred because the transaction alleged to have violated the statute—hiring Vanguard as the plan’s recordkeeper—is alleged to have occurred in 2002, while the lawsuit was filed in 2016.

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