NEPC: Overfunded DB Plans Rise 10% | Chief Investment Officer

The number of defined benefit pension plans reporting a funded status of more than 101% increased by 10% in 2017, according to a recent survey from investment consulting firm NEPC.

The NEPC’s 2017 Defined Benefit Plan Trends Survey reported that 19% of respondents were over-funded, which is up from 9% last year, and is at its highest level since the first survey was conducted in 2011. As a result, the percentage of plans surveyed who reported that they were funded less than 101% decreased to 81% from 91% last year.

The survey also found that among the over-funded plans, 65% invested in alternatives, and 55% used liability-driven investment strategies, with a majority of users implementing derivatives.

The NEPC said the rising variable rate premiums required by the Pension Benefit Guaranty Corporation (PBGC) had a significant influence on the improved funded status when deciding how to de-risk portfolios. Some 80% of plan sponsors said they will make changes to their plan strategy in the next six months, and of those who said they would, partial risk transfers (34%), and higher contributions (24%) were the preferred strategies named. The number of respondents saying they would seek partial risk transfers was up 15% from the 2016 survey, while the number of funds saying they would seek higher contributions increased by 5%.

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“The PBGC rate premium decision has had a major and lasting impact on plan sponsors and their strategies,” said Brad Smith, partner in NEPC’s Corporate Practice. “Not only have we seen an increase in over-funded plans to help hedge against these premiums, we’re also seeing plans accelerate the de-risking process. With so much at stake, we don’t expect plan sponsors’ anxiety toward rate premium increases to subside.”

The survey also said that the use of liability reduction strategies decreased 12% this year to 75%. In 2016, 87% of plan sponsors considered or implemented lump-sum payouts, the most popular choice. The NEPC said this decrease is likely a result of plans having seen diminishing returns from the payouts. When asked if they’d consider lump-sum payouts over the next six months, only 22% of plan sponsors said they would.

The NEPC survey was conducted online in August by the firm’s corporate defined benefits practice, which questioned 143 plan sponsors, including NEPC clients representing approximately $169 billon in defined benefit assets. The median plan assets among respondents was $750 million, and the average plan assets was $1.2 billion.

Tags: Defined benefit (db) pension plans, NEPC, Pension, Survey

Although state revenue growth has improved, the inability to meet growth in state expenditures places state reserves under large pressure, the Q4 edition of Conning’s State of the States municipal credit research report reveals.

The report, which ranks each of the 50 states by credit quality, found many states unable to pass budgets on time due to hesitation from legislators to pay taxes, a necessity in states where revenues were less than expected.

Conning found that Utah, Idaho, Florida, Nevada, and Colorado had the highest credit quality while Illinois, New Mexico, Mississippi, Connecticut, and West Virginia were ranked lowest.

The report also noted that the while Pacific Northwest, Mountain, and Southeastern regions are experiencing GDP growth at roughly 5%, there is slower growth (if any) in Northeastern and Midwestern states. Pacific Northwest and Southeastern states experienced “strong growth” in employment, personal income, and home prices, despite an overall declining credit outlook. Some oil and gas states also saw economic improvement due to natural gas prices increasing last quarter.

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“The most common thread for all higher-ranking states is a favorable business climate as measured by regulations, state tax policies, and state leadership,” Paul Mansour, a managing director, head of municipal research at Conning and lead author of the report, said in a statement. “We expect that the above-average economic activity in these states will prompt credit upgrades and better price performance going forward.” Mansour added that Conning is looking to add state and local credit exposure in regions and states growing more quickly, while being “more selective” in the slower-growing and lower-ranked states.

In addition, the report also sees no improvement in state pension plan funding since its Q2 State of the States report, noting that funding ratios have declined from 74.5% in 2015 to 71.1% in 2016, attributing one of the issues to states unable to agree on raising their taxes.

Another issue addressed for states already in rough shape are awaiting federal tax changes, specifically states with high personal income tax rates. Conning says that proposed tax reform which limits itemized deductions could mean little to no tax relief., In addition, possible changes in state Medicaid reimbursement plans means a risk-transfer from federal to state governments.

Conning also adds that economic debt’s continued accrual has impacted state credits as well, despite no notable growth in state debt over the past four years, mentioning that annual expenses to service fixed costs of obligations in high economic debt states can account for more than 20% of General Fund expenditures. While pension reforms help, Mansour said the best way states can reduce their economic debt is to “drive tax revenue with growth.” The report notes how California reduced its debt through strong economic growth in the technology sector, reflected by the incentives states and cities are offering “to attract” Amazon’s second headquarters.

Tags: Conning, Pension, Report, State of the States