Highway Bill: Two Sides of the Story for Pensions

The highway bill, signed by President Obama in July, should have substantially lowered aggregate pension funding obligations, yet the picture isn't entirely rosy.

(September 19, 2012) — Pension stabilization in the recently passed highway bill—more formally known as the Moving Ahead for Progress in the 21st Century Act (MAP-21)—will lower required contributions for single-employer pension plans substantially, according to a research report by Towers Watson.

However, it’s not all good news for pension funds.

“In some ways it makes plan sponsors happy, but it’s not entirely good for them,” Alan Glickstein, a senior retirement consultant at Towers Watson, asserts.

This may be a bad time for the Pension Benefit Guarantee Corporation (PBGC) to put pressure on plan sponsors, who are already facing difficulties. “Hitting them with more PBGC premiums sends a mixed message,” he says.

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While the implications of the bill include a change in the interest rate used to measure funding obligations, consequently lowering liabilities as well as contributions, plan sponsors must also battle a large increase in PBGC premiums, which will kick in over the next few years, Glickstein says. He added that the PBGC reiterates that it is currently able to pay what it needs to in order to aid struggling schemes, yet the independent reviews of the PBGC that Congress is demanding suggests that Congress isn’t fully convinced of the need for additional premium revenue.

Meanwhile, under the highway bill, the lowered contributions for plan sponsors will be most acute for plan years 2012 and 2013. Unless interest rates rise, however, required contributions will return to pre-MAP-21 levels in a few years, the Towers Watson report stated. “Before MAP-21, minimum required pension contributions were projected to nearly double between plan years 2011 and 2013—rising from $39.7 billion to $71.7 billion. Had interest rates continued to decline, the funding obligation for 2015 would have reached $105.8 billion,” the consulting firm explained.

Under MAP-21, aggregate pension funding obligations should be substantially lower, with aggregate minimum required contributions projected at $2 billion in 2012 with MAP-21 versus $54.2 billion without it. “Lower pension plan contributions generally imply lower funded levels for the future,” according to the report. “Plan sponsors need to carefully consider their own forecast of interest rates and whether contributing much less for the next few years is in their long-term best interest.”

Read Towers Watson’s full report here.

(September 19, 2012) – China Investment Corp. (CIC), the nation’s $482.2 billion sovereign wealth fund, is continuing the process shifting away from outsourced management and funds-of-funds investment.

“We will continue to pursue direct investments under our asset allocation strategy and build positions to capture stable returns in the long term,” CIC states in its most recent annual report. “We will further refine our project management system across the project life cycle, including project identification, decision-making, post-investment management and exit. And we are keen to explore ways to cooperate with our peers globally.”

A primary way the fund is becoming a more active investor overseas is through co-investing arrangements with private-equity fund managers, according to a Wall Street Journal report. One partnership, with Toronto-based Brookfield Asset Management, will focus on acquiring real assets in the Americas, such as timber, to shield CIC assets from inflations. Brookfield and CIC have an existing relationship: In 2010, the sovereign wealth fund, which is the fifth-largest in the world, contributed about $200 million to a $2.5 billion Brookfield fund specializing in real assets from the Americas.

The fund opened its first office outside of Asia in Toronto in January 2011, intending it to serve as a “platform for enhancing and broadening communication with stakeholders in Canada and expanding CIC’s business,” according to the 2010 annual report.

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CIC is also making a strong push towards insourcing asset management. As of December 31, 2011, CIC managed 43% of its assets internally, up from 41% at the same point in 2010. It’s following the lead of a number of other giant sovereign wealth funds, including the Alberta Investment Management Corporation (AIMCo). AIMCo has been beefing up its internal asset management staff, and aggressively developing the infrastructure and IT capabilities to run such an operation.

AIMCo’s CEO Leo de Bever told aiCIO in a 2010 interview that external fees were a major motivation to bring management in-house “I paid [US $160 million] in external fees last year,” he said in a December 2010 interview. “I think we can cut that down by four times if we move some of it internally.”