Corporate Pension Bond Bulls Could Further Flatten the US Treasury Yield Curve

The yield curve may keep flattening due to more corporate pensions looking to de-risk by moving their assets into fixed income.

According to Reuters and a report from Seattle-based consultant Milliman, the US equities rally of 2017 and larger pension contributions helped bridge the gap for corporate pension plans between assets and pension liabilities by $72.4 billion.

According to Milliman’s 2018 Corporate Pension Funding Study, the average funded status ratio for the 100 largest corporate US plans in 2017 was at 86%, up five percentage points from 2016.

While positive returns kept optimism bright, many plans have decided to shift a chunk of their assets into a lower-risk environment as not to repeat some of 2008’s mistakes, as economists and institutional investors such as Bridgewater Associates Ray Dalio predict a downturn in the coming years.

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Reuters reports that equities being converted into long-term debt has increased demand for corporate bonds as well as 10- and 30-year US Treasuries. Although the 10-year Treasury yield broke 3% on Tuesday, the curve is still flatter than it was at the beginning of the year.

According to Reuters, a total $1.5 trillion of corporate pension assets could boost bond rates enough to flatten the long end of the yield curve, which has been occurring aggressively over the past six-12 months.

Michael Moran, chief person strategist at Goldman Sachs Asset Management, told Reuters that although there is some speculation about how much money will go towards fixed income, it’s possible for US corporate pension plans to buy roughly $150 billion in high-quality, long-duration fixed income every year for the next several years.

Tags: Bonds, Corporate Pension, Milliman, Yield Curve

A California state Senate committee has rejected a trio of pension overhaul bills that were intended to stem rising pension costs for the state.

The bills that were rejected include a bill that would have barred pension funds that are less than 80% funded from providing cost-of-living adjustments; one that would have allowed local governments to leave CalPERS without paying large termination fees; and a third that would have allowed new state workers to opt for a 401(k) plan instead of a defined benefit pension.

Senate Bill 1031

The bill would have prohibited a public retirement system from making cost-of-living adjustments to new members joining in 2019 if the unfunded actuarial liability of that system is greater than 20%.

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The aim of the bill was to help curb accruing further unfunded pension liabilities, however, the Senate Standing Committee on Public Employment and Retirement said the bill would impose a prohibition on one aspect of deferred compensation for public employees. The committee said existing labor relations laws require compensation, including deferred compensation, to be collectively bargained between public employers and their employees.

“This bill is premature in that no bargaining and agreement over the terms of a ban or limitation on COLAs for new plan members has occurred,” said the committee in its analysis of the bill.

It also said that it was unclear how the bill could have substantially slowed the growth of the existing unfunded liability of CalPERS since that liability arises from benefits promised to current retirees and existing members.

“Any savings from the COLA freeze proposed by SB 1031 would be many years away and dependent on inflationary conditions far in the future,” said the committee.

Senate Bill 1032

This bill would have eliminated the existing Terminating Agency Pool (TAP) process for a contracting agency that seeks to end its CalPERS contract. It would have allowed an agency to terminate its contract with the board without having to fully fund the board’s pension liability.

Under existing law, the CalPERS board is required to hold the accumulated contributions from a terminated contract in a terminated agency pool for the benefit of the members. The terminating contracting agency is required to contribute to the terminated agency pool the difference between the accumulated contributions and the board’s pension liability for the contracting agency’s members, as provided.

“Eliminating the TAP is yet another way to undermine public-sector pension plans,” said the California Teamsters Public Affairs Council in its opposition to the bill. “The vitality of the entire systems rests upon collective participation by agencies across the state. Without the TAP, the state loses power over agencies that decide to sever ties with CalPERS or slash pensions.”

Senate Bill 1149

The bill would have created an optional defined contribution plan for new state employees who are eligible to become members of CalPERS, and who choose not to make contributions into the defined benefit program. It would also have required state employees to participate in an alternate system to contribute the same percent of compensation as similarly situated employees who contribute to the defined pension program.

The bill was opposed to by a slew of unions, including the Service Employees International Union, which argued that “virtually every study that compares DC and DB plans concludes that defined contribution plans are as much as 40% less efficient and more costly that a defined benefit plan in providing the same benefit.”

And the California Labor Federation said that the proposed bill “would shift all the risk on to workers, meaning an employee could lose most or even all their retirement saving due to a market crash or bad investments decisions.”

Although the killed bills won’t see the light of day during the current legislative session, they could be brought back for consideration in future sessions.

Tags: CalPERS, Pension, Pension Reform, Senate Standing Committee on Public Employment and Retirement