What Improved Funding Means for DB Plans

January 14, 2014 (PLANSPONSOR.com) – The speed at which defined benefit (DB) plans' funded status improved in 2013 may open the door for plan and investing changes.

“A lot of plan sponsors have a glide path in place for funding, but most did not anticipate reaching those glide path milestones so quickly.” Jeff Leonard of Wilshire Associates Inc. tells PLANSPONSOR. On the whole, he says, 2013 was a surprising year in terms of how quickly plans moved in favor of improved funding status. “Interest rates went up a little more than anticipated.”

Research from Wilshire shows that as of December 2013, the funded ratio for corporate DB plans rose by 0.9%, driven by the increase in assets and bond yields used to calculate plan liability values. Overall, the asset value rose 0.8%, while the liability value remained unchanged from November 2013.

Over 2013 as a whole, research shows the funded ratio of corporate DB plans rose by 15.4%. Again, this increase was attributed to corresponding increases in assets and bond yields. For the year, the asset value rose by 10.3%, due to an increase in both U.S. and non-U.S. equities. Liability values were volatile during the first half of 2013, but stabilized during the second half of the year.

The underlying volatility in liabilities was the main factor in changes seen with plans’ funded status, according to the research.

As to how DB plan sponsors are investing their plan assets, Leonard says, “What we’re finding is that some plan sponsors are operating with a long-term view of their plan. Many are freezing or terminating their DB plans and they are looking to see how they can invest and minimize risk.” Leonard, who is Wilshire’s head of actuarial services and based in Pittsburgh, adds that sponsors of DB plans that are closer to being fully funded may be operating within a time horizon that is even longer than those of frozen DB plans.

The research by Wilshire also reveals many foresee pension risk transfer activity increasing in 2014 due to higher funded ratios for DB plans. One result of this predicted trend is that the offering of lump sums to participants may become a more attractive option to plan sponsors.

Leonard says, “Improvements in mortality, both lately and over the past 30 years, have surprised people.” Right now is probably a good time offer lump sums to participants, he adds, since updated mortality information will be made available by the Internal Revenue Service (IRS) in 2015 or 2016, which will affect the value of lump sums. Research also indicates that this new mortality data could increase plan liability by 5% or more.

Leonard explains that while organizations such as the Society of Actuaries conduct studies on mortality rates on a regular basis, there is usually a bit of lag with the IRS adopting such data. This is due to the fact that the IRS usually releases temporary regulations related to these mortality tables, which then undergo several rounds of comments from stakeholders before final regulations are enacted.

More information on the research, which was featured in Wilshire’s December 2013 issue of the Retirement Actuarial Newsletter, can be requested by e-mailing wilshireactuarial@wilshire.com.

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