Discount Rate Increase Helps Grow Pensions in February

A report from Legal and General Investment Management (LGIMA) reveals a 0.2% post-stock market selloff jump for pension funding ratios in February, driven by an increased discount rate offset by negative equity returns as well as interest and credit markets.

After experiencing the heavy correction in the beginning of February, which the LGIMA Pension Solutions Monitor mentions was initially thought to be caused by technical divers within systematic short volatility strategies, nearly every major index was in the red—a swift blow to pension plans’ funded status.

However, LGIMA saw continued positive economic data, with pension plans boasting strong Q4 earnings, a higher-than-expected CPI print, wage growth, and fiscal stimulus measures that continued to be viewed as “badly-timed.” The report also noted the growing concerns of inflation, rising rates, Federal rate increases, and both direct and indirect repercussions for risk markets.

Interest rates, on the other hand, had a positive effect on February funding ratios as the continued selloff helped move the five and 30-year Treasury rates up 13 and 19 basis points, respectively. Long-end rates also experienced an 8-basis point rise due to a strong ISM print on the first of the month. The selloff continued the following day with a surprise wage growth boost revealed in the January employment report, and although the short-lived, volatility-driven equity selloff on Feb. 5 briefly halted the bond sale, the Senate budget resolution’s passing caused it to pick up later in the week.

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After the interpretation of the Fed minutes from the January meeting, long-end rates experienced their highest intraday since July 2015 at 3.23. Later this month, Jerome Powell will take his seat as Fed Chair. According to the report, he is expected to continue the trend of optimism towards US economic growth.

According to the report, credit spreads were also good for pension funding ratios in February due to increased supply, inconsistent supply from foreign investors, and the anticipation of the approximately $40 billion CVS agreement to fund the acquisition of Aetna. Demand for long-dated credit has increased, with 30-year Treasuries above 3%, however, LGIMA saw the markets grow wider “to find a new clearing level,” LGIMA writes. LGIMA said it is seeing softer technicals from every other part of the yield curve.

As for pension liabilities, the average pension plan liabilities were down 3.1%, and for plans with a traditional 60/40 allocation, the drop was 2.9%. LGIMA also mentions that pension plan contributions have increased due to the US tax reform laws (which have raised value for cash contribution deductions), increasing PBGC premiums (which allow companies to reduce risk by funding deficit), and debt being raised by plan sponsors to fund their deficits. As plans continue to de-risk due to better funded ratios, rising interest rates, and positive equity returns, LGIMA expects a bevy of contributions to go toward fixed income.

Tags: Funding Ratios, Legal & General Investment Management (LGIM), Pension, Report

According to its latest actuarial valuation in January, the $9.4 billion Colleges of Applied Arts and Technology Pension Plan (CAAT) is 118% funded, with a $2.3 billion funding reserve.

While this is not just an upgrade of the previous year, when it was 113% funded with a $1.6 billion funding reserve, the valuation will be filed with the regulator sometime in the next few weeks. By choosing to file the actuarial valuation, CAAT will not have to file another valuation until 2021, keeping flat contribution rates for its 46,000 members and 41 employers until 2022.

To guarantee economic and demographic assumptions are still realistic and appropriate for CAAT’s risk tolerance, each funding valuation includes a review of each of the aforementioned assumptions. According to the valuation, the discount rate remained at 5.6%

“As of January 1, 2018, our funded ratio, the core measure of benefit security, reached 118%—the strongest position since becoming jointly governed 22 years ago,” Derek W. Dobson, CAAT’s CEO and plan manager, said in a statement.

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“Research shows that Canadians want the adequate and predictable retirement income that a well-governed and expertly managed defined benefit plan delivers and they are willing to make meaningful contributions to it. Employers benefit through lower operating costs, stable contribution rates, and lower risk by exiting the pension management business,” he said. “Long-term projections show the plan’s financial health should remain resilient into the future providing benefit security and contribution stability to our members and employers.”

The fund—a modern defined benefit plan—has been jointly governed since 1995, meaning that government, community, and private sectors work together to achieve the goals of the overall fund rather than just focus on individual sectors. The plan is also jointly sponsored by three entities: the College Employer Council, the Ontario Public Service Employees System, and the Ontario College Administrative Staff Association.

When it comes to building additional reserves, prefunding conditional inflation protection, and reducing contributions, the CAAT’s plan governors can utilize any combination under the plan’s funding policy. The plan governors currently decided that the best move at this time is continuing to allocate additional reserves to ensure benefit security and contribution stability.

The plan has also continued to grow by adding new employers, including the Youth Service Bureau (YSB) of Ottawa, whose plan members voted in favor of a merger of the YSB’s defined benefit plan with the CAAT’s. If the regulator approves of the asset transfer, it will be second time a single employer defined benefit pension plan will merge with the CAAT, the first being the 2016 merger of the Royal Ontario Museum pension plan.

“The CAAT Plan is open and ready for growth in membership where it is beneficial. This includes workplaces with single-employer defined benefit pension plans, defined contribution plans, and those without a pension plan, including those in the private and not-for-profit sectors,” said Dobson. “We are in discussions with several organizations and employee groups about them joining the CAAT Plan and are excited to be able to offer our successful model for sustainable defined benefit pensions.”

Alongside its annual investment report, the CAAT will release its 2017 investment results in April.

Tags: CAAT Pension Plan, Defined benefit (db) pension plans, Funded Status, Pension