Editor’s Note: This is Part I of a two-part series highlighting some trends involving private-sector pension plans in the early part of 2024.
The winter doldrums were anything but this year, at least as far as pension funds are concerned. At the very least, regarding funding, shedding liabilities, and risk transfer.
Funding
Heat, not a freeze, for private-sector pension plan funding this winter. Three studies—by analysts at Aon, Milliman, and October Three—reported that by the end
of January the plans they track showed an improvement in their funded ratios of up to 1 percentage point. October Three tracks two hypothetical plans, one traditionally invested, the other conservatively; Milliman looks at the 100 largest corporate pension plans, and Aon does daily tracking of funded status of the pension plans run by S&P 500 companies.
Things heated up in February. Aon showed a jump in the aggregate funded ratio of 3.3 percentage points, up to 104.2% on Leap Day. Wilshire showed an even stronger 4.4-percentage points improvement, and October Three said that the funded ratio of its traditional plan was 5 percentage points better off than it was on Groundhog Day. Funded status, too, warmed in February: Aon reported an aggregate improvement of 2.8 percentage points to 104.2%.
Shifting Assets
Some employers have sought to shift management of plan assets when their plans become overfunded.
For instance, on March 1, 2024, Eastman Kodak announced that it had engaged NEPC, LLC to perform the Outsourced Chief Investment Officer and investment fiduciary functions for Eastman Kodak’s U.S. pension plan. Their plan’s overfunding skyrocketed since 2019, when it stood at around $100 million. In all, their pension plans amount to $7 billion.
Kodak says that as of Dec. 31, 2022, the fair value of its pension plan assets stood at approximately $3.7 billion, while the projected benefit obligations were around $2.5 billion—resulting in overfunding of approximately $1.2 billion. According to Bloomberg, that was more than twice what had been anticipated.
Liabilities
Part of the explanation for the improved funded status and funded ratios is a decrease in liabilities.
In January, Aon, Milliman and October Three all said that the drop in liabilities in the plans they monitor outstripped losses in assets, and Aon reported an aggregate drop in liabilities of $29 billion. And in February, Wilshire reported a 2.8-percentage point decrease in liabilities, and Aon said liabilities among the plans they track dropped by $68 billion.
The Effect of Interest Rates
Rising interest rates are part of the explanation for lower liabilities. “The significant increase in interest rates reduced the size of plan liabilities,” Aon said in a 2023 report. Bloomberg backs that contention, reporting that higher interest rates had reduced Eastman Kodak’s pension plan liabilities.
Rising interest rates already were having a pronounced effect in 2022, say other reports. Legal & General Retirement America suggests that in its November 2023 Pension Risk Transfer Monitor. And Jason Russell and Seth Almaliah of Segal say so in a recent blog entry as well. They write that it has been more than 15 years since interest rates have been so high, and that has been the case since late 2022.
Interest rates were not only a factor in reducing pension liabilities, say analysts—they also are part of the reason pension risk transfers have become more numerous, as well. Russell and Almaliah said as much in their blog entry, arguing that current interest rates create opportunities to reduce pension plan risk that did not exist before.
Aon agrees, saying in its 2023 report, “Rising interest rates served as a catalyst for increased PRT activity in 2022.” Not only that, they also say the scale of the interest rate increases and their effect on plan liabilities in turn reduced the premiums on individual PRT deals.
Next: Pension Risk Transfers Heat Up
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