Largest Pensions Troubled By Longer Lifespans

The United States’ 19 largest pension funds hold roughly 40% of the nation’s pension obligations, according to Russell Investments, so it’s no big surprise they are struggling with longevity trends.

An assessment of Russell Investments’ “$20 Billion Club,” an index tracking the largest private U.S. pension funds, finds “actuarial losses” had the most significant impact on pension performance during the last year.

Russell defines actuarial losses as those pinned to interest rates and mortality assumptions, among other factors. Since early 2014, both interest rate declines and updated mortality assumptions have seriously dampened mega-plan funded status, Russell says.

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Russell’s $20 Billion Club comprises the 19 largest corporate defined benefit (DB) plans that together represent roughly 40% of the pension assets and liabilities of all U.S. publicly listed corporations. New Russell data shows these corporate DB plans have seen a ballooning projected benefit obligation hit their balance sheets in the past year, largely underpinned by the adoption of updated mortality assumptions for accounting/actuarial purposes.

These lackluster results come after a resurgent 2013 for large pensions. At the start of financial year 2014, Russell says, these mega-pensions faced a combined deficit of $114 billion, the lowest it had been since 2007.

“However, by the end of 2014, that figure had risen to $183 billion, hit by a double blow of an unexpected decline in interest rates and updated assumptions about how long retirees are expected to live,” Russell’s analysis explains. 

Russell says the impact of investment returns has actually been neutral or positive in every year for the past decade or so, discounting 2008’s meltdown. “Plan sponsor contributions outpaced new benefit accruals and hence had a steady positive impact over this period,” Russell adds. “The big headwind has come in the shape of ‘actuarial losses.’”

As explained by Russell’s Bob Collie, chief research strategist, Americas Institutional, yearly actuarial gains and losses can be traced largely to changes in interest rates. Falling rates lead to higher values being put on the liabilities, while rising rates lead to lower liability values. 

In 2014, the median discount rate used for U.S. plans fell by 0.83%, to 4.02%, pushing liabilities up and hurting funded status. In an added twist, this fairly sizable and largely unpredicted drop in interest rates came during the same year as significant changes in commonly used mortality tables that help plans make assumptions about life expectancy.

“The widespread adoption of newly published mortality tables added some $29 billion to the combined liabilities [of the $20 Billion Club], turning an already negative year into a significant setback,” Russell says.

Industry experts have noted that pension plans should expect more frequent mortality assumption updates—likely leading to additional funding stress. However, the Russell analysis goes on to suggest liabilities are about as high today as they will ever be, though knowing exactly when liability values may peak is tough.

“When interest rates rose in 2013, we concluded that liabilities most likely had indeed peaked and that they would never regain the high of 2012,” Collie says. “But that conclusion reckoned without the combined impact of a fairly sharp fall in interest rates and the speedy adoption of the new mortality tables. Together, those effects have led to a 2014 liability value that is even higher than 2012: against the odds, pension liabilities have re-peaked.”

Given this turn of events, Collie says Russell currently “offers no predictions as to whether 2014 now represents peak pension liabilities or whether liability values will go higher still.” The main source of uncertainty is actuarial gains/losses: the combined effect of the other variables (service cost, benefits, interest cost, and others) is relatively stable and can be expected to tamp down the combined liability value by perhaps $5 billion to $10 billion, or more if there is substantial pension risk transfer activity in 2015.

The $20 Billion Club was launched in 2011 and at the time represented 16 U.S. pensions meeting the minimum asset hurdle. Additional information and analysis is here

NYC Aims for Private Sector Retirement Program in 2015

New York City has launched the New York City Retirement Security Study Group, a panel tasked with advancing private-sector retirement security solutions for city residents during 2015.

Under the leadership of Comptroller Scott Stringer, New York City says it is poised to become the first city in the United States to advance comprehensive retirement security solutions at the local level, with as many as three public-private retirement savings options to be established this year.  

Stringer announced the formation of the Retirement Security Study Group (NYC RSSG) a few months after the city’s Public Advocate, Letitia James, proposed legislation that would create a board tasked with studying and establishing a centrally pooled pension fund for the city’s private sector.

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Stringer says the NYC RSSG group is charged with developing “innovative and affordable savings options” for the growing number of New Yorkers without access to retirement plans at work. Stringer’s office notes that he first announced his plans to form the study group in June 2014 at a conference at The New School in New York City.

“Too many New Yorkers are facing a fiscal cliff when it comes to their retirement, without sufficient savings to live out their lives in dignity,” Stringer says. “We need to create more retirement savings options, and provide New Yorkers with safe, affordable strategies to plan for their future. That will not only help to preserve the City’s fiscal health and promote our economic well-being, it will help to give seniors the financial resources they need to partake in all that this City has to offer.”

Stringer points to recently released data from The New School showing nearly six in 10 (59%) New York City residents between the ages of 25 and 64 lack access to any retirement plan at their place of employment to highlight the need for more savings options. Furthermore, Stringer says, 44% of New York households headed by an individual in this age group, and 40% of households headed by someone aged 55 to 64, have less than $10,000 in liquid assets that could be used to provide financial support in retirement.

The seven-member RSSG will be chaired by Scott Evans, appointed last year by Stringer to serve as Deputy Comptroller for Asset Management and Chief Investment Officer of the New York City Pension Funds. Prior to this position, Evans worked for more than 27 years at TIAA-CREF.

Stringer says the study group will be fully funded through existing resources within the Comptroller’s Office. He says it will work to develop “up to three retirement savings options by the fall of 2015 that comply with all relevant state and federal laws and protect City residents from liability.”

Those options will then be considered by another task force, to be named at a later date, comprised of key stakeholders, including representatives from government, labor, business and the policy and non-profit sectors, as well as other relevant parties, Stringer says.

“These study group members are all national leaders in the area of retirement security, and I am honored that they have chosen to join this effort,” Stringer notes. “Our goal is to create options that can meet the needs of employees and employers, while protecting taxpayers and upholding the interests of City pension beneficiaries.”

In addition to chairman Evans, the full NYC Retirement Security Study Group includes Teresa Ghilarducci, David Laibson, Olivia S. Mitchell, Alicia Munnell, Joshua Rauh, and Stephen P. Zeldes. Background information on RSSG members, as well as more information on New York City’s plans for establishing more retirement savings options for private-sector workers, is available at www.comptroller.nyc.gov.

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