How Pandemic-Related Increase in Retirements Affects DB Plans
A sharp jump in the number of workers who decide to retire early does not bode well actuarially for DB plans, but experts say the pandemic-related exodus is not a long-term trend.
The coronavirus has changed a lot of people’s outlooks. For some, all that death and anxiety have produced a carpe diem spirit that makes retiring seem much more enticing. If that’s the case, a rush of employees filing for pension benefits could have major reverberations for plan sponsors. But how much?
Counterbalancing all that pandemic angst is that things are looking up this summer. More than a year after the pandemic cloistered people indoors, nearly half of Americans are fully vaccinated—although they’ve fallen short of the Biden administration’s goal for 70% of American adults to get at least one dose by July 4 weekend. Many are enthusiastically resuming “normal” life in long off-limits public spaces: restaurants, bars, movie theaters. The grim uncertainty of March 2020 has given way to better clarity and optimism for the future.
Still, how the pandemic has affected workers in defined benefit (DB) plans during the pandemic is less clear. Early anecdotal evidence suggests a mixed bag. Some plan sponsors are experiencing little to no change in their pool of employees. Others have already reported sharp rises in the number of retirements they’ve seen this past year, even though precise figures on how many have taken earlier-than-scheduled exits are mostly unknown.
Plan sponsors for teachers and public safety workers are reporting the most changes. In Chicago, for example, police officer retirements reportedly were up 15% in 2020 from the year before. In Minneapolis, a reported one-fifth of the city’s police officers have either retired or taken leaves of absence. Leaders of the police department are concerned that many of those departures may wind up being permanent.
During normal times, a sharp jump in the number of workers who decide to retire early does not bode well actuarially for DB plans. Employees who work less than they were expected to will pay less into the system, while also collecting retirement benefits over a longer period, presumably. (This effect might be partly offset by the fact that they’re getting a smaller payout than if they’d stayed longer.)
But the pandemic was not a normal occurrence, and it might be that other mitigating factors like the mortality rate may dampen any effect early retirements have on the system. In any case, experts say a single event like the pandemic is not likely to have an impact on the long-term funding of any plan, much like a year of excessively poor returns may mean little over a 10-year period.
“Presumably, the pandemic is a one-time event that is going to go away. And that means that early retirements through the pandemic is not necessarily a long-term trend,” said Keith Brainard, research director for the National Association of State Retirement Administrators (NASRA).
Effect on Retirement Timing
“It’s not necessarily something that’s going to change the assumption for the retirement rate, but rather those are really sort of one-time retirements that are going to pull forward retirement rates for a limited period,” Brainard added.
Take the California State Teachers’ Retirement System (CalSTRS), which in February reported that it had its second-highest year for retirements in 2020, behind the fallout from the Great Recession. The pension fund reported a steep 26% jump in the second half of 2020 from the same time a year before.
When the pension fund for educators surveyed roughly 500 of these retirees, about 62% said they retired earlier than they planned. More than half said the challenges of teaching during the pandemic pushed them to seek an early out. Still, a CalSTRS spokesperson said this week that the fund does not expect the retirements to have a “material impact” on the funding levels.
Broadly speaking, any damage from early retirements is going to be “fairly muted,” according to Kevin McLaughlin, head of liability risk management for North America at Insight Investment.
There are several possible reasons for this. While early retirements might be on the rise, so, too, is the aforementioned mortality rate from some 600,000 Americans who have died thus far because of the coronavirus, which has the morbid effect of offloading liabilities for the pension fund.
Not to mention, investment returns have been staggeringly high this past year for many allocators, who quickly recovered early 2020 losses from the downturn as the capital markets made a wild swing upward.
Of course, experts say it’s too early to tell what impact the pandemic has had on DB plans. It takes about five to six months for pension plans to draw up their annual financial reports. Since many public pension funds close out their fiscal year on June 30, as in yesterday, plan sponsors are likely to have a better idea in November or December how retirements from this past year affected their funds.
What may be even more important for pension fund leaders and economists to watch from here onward is the continued possibility that some people will drop out of the economy altogether, according to Brainard. If the overall size of the labor pool shrinks, and fails to return to what it was before the pandemic, that will affect state and local governments. Government employers will have to pay more into the pension funds to make up for the low level of worker contributions.
For plan sponsors, what happens to the labor participation rate for government workers will be a key development to watch.This article was originally reported by CIO, PLANSPONSOR’s sister publication.
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