Falling Bond Yields Push Model US Pension Funded Status Lower

The funded status of the model pension plan tracked by consulting firms Sibson Consulting and Segal Marco Advisors fell to 86% in the second quarter of 2019 from 88% the previous quarter as a 4% gain in assets was outpaced by a 7% increase in liabilities.

“Equities ended in positive territory both internationally and domestically. US stocks continue to outpace international stocks, and within the US, large cap outpaced small cap stocks,” Segal Marco Advisors’ David Palmerino said in a statement. “At the same time, the 10-year US Treasury yield fell substantially, perhaps indicating that the market expects the federal funds rate to decrease.”

In its quarterly review, the firms said equities followed up a very strong first quarter with a second quarter that was volatile, but still ended in positive territory on both the domestic and international fronts. During the quarter, April and June were positive months that more than compensated for the negative performance during May.

Developed market stocks outperformed emerging market stocks, however both lagged behind surging US stocks, among which large-cap stocks out-clipped small caps for the quarter, while growth beat out value for the ninth time in the last 10 quarters.

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Fixed income had positive returns for the quarter both domestically and internationally, as longer-duration bonds performed particularly well. The US Federal Reserve’s Board’s Federal Open Market Committee (FOMC) left the Federal Funds Rate unchanged at its June meeting, and maintained a target range of 2.25% to 2.50%.

Meanwhile US Treasury yields fell as the 10-year US Treasury yield tumbled during the quarter to end June at 2%—its lowest level since 2016, and perhaps indicating that the market expects a rate decrease at one of the upcoming FOMC meetings.

High-quality corporate yields fell 45 basis points during the quarter, which was the net result of a 35 basis-point decrease in US nominal Treasury yields, and a 10 basis-point decrease in credit spreads. At the same time, yields dropped sharply, resulting in a slightly steeper yield curve that led to the 7% increase in the model pension plan’s liabilities.

The firms said that now is a good time for plan sponsors to examine their plan’s risk-mitigation strategy as they review their approach for the second half of 2019.

Sibson, Segal Marco Model Pension Funding Status Rises to 93%

Two pension buyout plans launched last year by Illinois that were intended save the state an estimated $423 million in fiscal year 2019 have fallen far short of their goal, and created estimated savings of only $13.1 million.

The move was designed to help chip away at the system’s $129 billion pension debt after prior attempts to reduce retirement benefits failed when courts ruled those unconstitutional. The buyouts were intended to reduce state pension costs by allowing workers to give up future benefits in exchange for immediate payouts.

Illinois authorized two voluntary buyout plans that applied to the three largest state retirement systems. One, known as a cost-of-living adjustment (COLA) buyout, was an automatic annual increase buyout plan under which tier 1 members would give up their 3% annual compounded benefit increases in exchange for yearly increases of 1.5% of their base pension amount. Members who elect this buyout plan received a lump-sum payment equal to 70% of the difference between the value of their benefits with the higher and lower annual increases.

The other plan was an inactive member buyout plan under which inactive tier 1 and tier 2 members, who are no longer employed at their state pension-eligible jobs but are qualified for state pensions, would receive 60% of the current value of their pensions as a lump-sum payment.

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The COLA buyout plan was expected to save the state $382 million, while the inactive member buyout plan was forecast to save $22 million. The savings estimates were based on the assumption that 25% of retiring tier 1 members would participate in the COLA buyout, and 22% of inactive members would participate in the other buyout plan.

But far fewer members opted for the buyouts than the state had anticipated. According to a monthly briefing from Illinois’ Commission on Government Forecasting and Accountability, the Teachers’ Retirement System of the State of Illinois’ (TRS) actuary noted that “an immaterial number” of members have chosen the two pension buyout programs so far in fiscal 2019, thus “eliminating” the assumption that TRS members will participate in the buyout programs.

At the time the programs were announced last year, Moody’s Investors Service warned that attempts to tackle the state’s pension debt would be futile without making major cuts. It said that “a failure to adopt mitigating strategies soon will greatly increase the state’s risk that these rising costs will become unaffordable” without “severe” reductions.

Tags: Cost of Living Adjustment, Illinois, Pension, Pension Buyouts