Houston Issues $1 Billion in Pension Obligation Bonds

Issuance is final piece of Houston Pension Solution reform package.

The city of Houston has issued $1.01 billion in pension obligation bonds toward its pension reform package, known as the Houston Pension Solution, which will immediately reduce the city’s $8.2 billion in unfunded liabilities through future benefit reductions.

With the bond issuance, “the city upholds its promises to its pension systems and residents, and drastically improves its financial trajectory,” said Houston City Controller Chris Brown in a statement. “Houston residents can rest easier today knowing that meaningful pension reform is finally in place.”

Houston’s pension reform plan received support from Houston City Council, the Texas Legislature, and Houston voters, who voted for the issuance of pension obligation bonds in November.

“The city’s all-in True Interest Cost (TIC) for this issuance came in at 3.965411% – significantly lower than we initially anticipated,” said Brown. “This represents significant cost savings, and demonstrates investor confidence in this plan’s impact on the City of Houston’s bottom line.”

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Of the $1.01 billion in bonds, $750 million in liquidity will go to the Houston Police Officers Pension System (HPOS), and $250 million will go into the Houston Municipal Employees Pension System (HMEPS). Brown said the liquidity shores up the more than $1 billion in deferred payments to the pension systems, and was critical to the systems’ buy-in of the city’s pension reform plan.

The Houston Pension Solution plan, which was passed in May, moves to a 30-year closed-loop amortization schedule, and uses a 7% assumed rate of return on investments. The plan prohibits the city from deferring payments to the systems. The 7% discount rate is balanced by the implementation of a risk sharing mechanism known as the “risk-sharing corridor,” which caps the city’s contribution rate and sets boundaries for its pension costs. The corridor is intended to protect the city, while ensuring that it upholds its financial promises to its employees. 

The plan was supported by two of the three pension systems, labor organizations representing city employees, and more than 40 CEOs and Houston-area business leaders who signed a letter of support. However, the plan was opposed by the Houston Firefighters’ Relief and Retirement Fund, which complained that the final proposal had removed three amendments that had been supported by the firefighters’ pension, but opposed by the mayor’s office. The removed amendments would have given the firefighters more time to negotiate, and would have protected retired firefighters from being subjected to benefits reductions.

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Analysis: Largest US Corporate Pensions’ Funded Status Improves

Willis Towers Watson cites strong stock market performance and  significant employer contributions as reasons for growth.

 

Willis Towers Watson cites strong stock market performance and  significant employer contributions as reasons for growth.

The largest US corporate pension plans can enter the new year with clear minds and determination, as a new analysis by Willis Towers Watson reveals modest improvements in their funded status in the end of 2017 to the highest they’ve been since 2013.

Examining pension plan data for the 389 Fortune 1000 companies that sponsor US defined benefit plans with a December fiscal-year-end date, Willis Towers Watson found that the average plan’s funded status was at an estimated 83% at the end of 2017–2% higher than 2016’s 81%.

The analysis also discovered projections that the pension deficit has decreased to $292 billion at the end of 2017. The deficit at the end of 2016 was $317 billion.

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Willis Towers Watson attributed the rise in funded status to strong stock market returns and significant employer contributions possibly piggybacking on the growing trend of liability-driven investment (LDI) strategies as well as the rising Pension Benefit Guaranty Corporation (PBGC) rates.

“Strong stock market performance throughout the year and robust employer contributions to their pension plans helped to boost funded status to its highest level since 2013 after several stagnant years,” Willis Towers Watson Senior Consultant Matthew Siegel said in a statement. “Several plan sponsors contributed more to their plans last year than originally expected, most likely in response to rising Pension Benefit Guaranty Corporation premiums and growing interest in de-risking strategies, and potentially in anticipation of lower future corporate rates from tax reform. The improved funded position occurred even though pension discount rates finished the year down approximately 50 basis points from the beginning of the year.”

Pension plan assets increased as well in 2017. Findings from the analysis show that the year-end estimations grew from 2016’s $1.33 trillion in assets to a projected $1.43 trillion at the end of 2017. While returns varied drastically from class to class, Willis Towers Watson estimated an average 13% for overall investment returns.

In the case of equities, domestic large-cap equities experienced an estimated 22% returns, while domestic small-/mid-cap equities weighed in with 17% returns. As for bonds, aggregate bonds saw a 4% return, while long corporate and long government bonds—commonplace in LDI strategies—provided 12% and 19% returns, respectively.

At an estimated $51 billion, employer contributions nearly doubled the amount needed to cover their accruing 2017 benefits, dwarfing the $43 billion employers contributed to their plans in 2016. However, total pension obligations increased from 2016’s $1.65 trillion to an estimated $1.72 trillion in 2017. According to Willis Towers Watson, the biggest changes are lower discount rates  largely offsetting the decrease for benefits paid.

“The uptick in funded status is welcome news for many plan sponsors,” said Beth Ashmore, senior consultant at Willis Towers Watson, in a statement. “As we look to 2018, we anticipate employers will begin to digest the new tax bill and what it may mean for their benefit plan financing. Employers should consider their broader pension management strategy as they make that evaluation, which may include reviewing their investment strategy or implementation of pension de-risking strategies, such as an annuity purchase.”  

The actual 2017 year-end results of the pension plans will be publically available in the coming months.

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