What can corporate allocators expect now that the pension relief bill has passed? For starters, they can target lower returns and pursue less risky investment strategies.
Plan sponsors at single-employer pension plans can reduce their return targets to as low as 4% or 5%, versus higher targets of 6% or 7%, when they extend their amortization periods to 15 years as a result of the stimulus bill, according to calculations from asset manager Insight Investment.
Earlier this month, several provisions passed under the Butch Lewis Emergency Pension Plan Relief Act of 2021 (EPPRA), in the $1.9 trillion American Rescue Plan, alleviated funding pressures for defined benefit (DB) plans. Single-employer plans cover about 23.5 million workers, according to the Pension Benefit Guaranty Corporation (PBGC).
Corporate plans have experienced pension relief in the past under different bills. But under the COVID-19 relief bill, they not only can extend their amortization periods to 15 years, up from seven years, but they also got an extension on smoothed interest rates.
In other words, pension plans that could amortize higher discount rates and lower liabilities over seven years in the past can now close the funding gap over 15 years. It would reduce minimum contribution requirements for plan sponsors or defer them out into the future.
“This will be very helpful to them to manage their near-term cash flow,” said Kevin McLaughlin, head of liability risk management, North America, at Insight Investment.
Without the pension relief, a typical fund would have needed returns of more than 10% per annum for the next four to five years to close the gap without minimum contributions, according to McLaughlin. But, he said, “now they can move that down significantly.”
For single-employer allocators, the pension relief bill also means they can close the gap on their unfunded liabilities with less risky investment strategies over a longer time horizon. That’s a boon for those that have been seeking high returns in a low-interest rate environment, even as corporate plans managed to emerge from last year in relative health compared with multiemployer pension funds. It also means they can de-risk their plans that much more aggressively.
That could hasten other investment trends at corporate plans, Insight Investment reports. Plan sponsors could use this as an opportunity to push deeper into fixed income and alternative assets over equities.
It could also reduce the number of pension risk transfers (PRTs) for corporate funds. Well-off DB plans may want to keep a balanced plan on the books to improve the credit outlook for the firm.
Of course, weaker funds, and even better-funded corporate plans, can still voluntarily contribute more to manage the cost of plans. They could also offset the cost of rising PBGC premiums.
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Tags: Butch Lewis, Coronavirus, COVID-19, PBGC, Pension Benefit Guaranty Corporation, Pension Reform, relief bill, single employer