In this article we present some “lessons learned,” thus far, with regard to 2020 annuity settlements – transferring DB liabilities with respect to one or more participants to an annuity carrier. We say “thus far” because it is still practical for some sponsors to transfer DB liabilities to a carrier this year.
Pension plan funded statuses have generally declined in 2020 and PBGC premiums will increase in 2021. Now may be the perfect time for your plan to reduce premiums by reducing headcounts.
Defined benefit plan valuation interest rates have declined nearly 200 basis points since late 2018. Interest rate stabilization has significantly mitigated the effect of this decline on plan funding. GAAP accounting (e.g., balance sheet disclosure) is, however, indexed to current rates, and the steep declines in interest rates have presented a number of challenges and opportunities for defined benefit plan sponsors.
The Social Security Administration just announced benefit increases effective in 2021. Current retirees will receive a cost-of-living increase, beginning in January 2021, of 1.3%, reflecting the increase in CPI-W between the 3rd quarter of 2019 and the 3rd quarter of 2020.
Vice President Biden’s suggestions on tax policy changes address corporate and personal tax rates. But these changes will potentially impact corporate pension plans, too.
Lower stock prices hit pensions during September. Both model plans we track lost ground last month, with Plan A dropping 2% and Plan B slipping 1% during the month. For the year, Plan A is now down 5% and Plan B is down more than 1% through the first three quarters of 2020.
Defined benefit plan sponsors that (1) currently using the standard (spot-rate) method to determine unfunded vested benefits (UVBs) for purposes of calculating Pension Benefit Guaranty Corporation variable-rate premiums, and who (2) have the ability to elect to switch to the alternative (24-month average) method, may have an opportunity to reduce (in some cases significantly) 2020 variable-rate premiums by doing so.
For sponsors, PBGC’s new guidance is very good news, giving them extra time to make contributions that may reduce PBGC variable-rate premiums. We note that Notice 2020-61 generally requires an amendment to the Form 5500 for post-filing contributions that are counted as contributions for that plan year.
Pensions enjoyed their best month of the year in August, driven by higher stock prices and higher interest rates. The average duration 7 annuity purchase interest rates increased 16 basis points and average duration 15 rates increased 27 basis points since last month as seen in the below graph titled Annuity Purchase Interest Rates.
On August 31, 2020, the Department of Labor released a proposed regulation revising DOL’s rules for the voting (or not voting) of proxies by ERISA plan fiduciaries. The new rule requires that fiduciaries apply an economic cost-benefit analysis to decisions about whether or how to vote proxies and/or engage in shareholder activism that is explicitly stricter than current rules.