2021: Plan Funding, Inflation Effects Up

Last year brought a variety of trends to defined benefit plans and those who run and benefit from them, notes a recent report looking at some of the key developments in 2021.

October Three, which tracks two hypothetical DB plans—one that is invested in a more traditional way and another invested in a conservative manner—says in a recent wrap-up of 2021 developments that improved plan funding is one of the important developments in 2021. They report that by the end of November, despite some slippage in pension finances in November they still improved overall for the year. To wit: the finances of the traditionally invested plan still were up 10% for the year, and those of the conservatively invested plan still were up by more than 2%. 

And pension liabilities gained less than 1% during November but are still were down 1%-3% for the year, October Three adds; noting that the largest declines were among long-duration plans.

Inflated Inflation

October Three also highlighted the effects of sharply increasing inflation on retirement plans and their finances in 2021. They call inflation “a major, emerging pension finance story for the year” and report that in November, the Consumer Price Index (CPI) showed a 6.8% increase over 12 months. A rising CPI hurts buying power of everyone, says October Three, including those relying on pension and retirement benefits. And that, they warn, can hurt retirement security—so retirement savers should incorporate inflation in their calculations.

October Three says defined benefit plan annuitants and defined contribution plan participants who have bought (either in the plan or outside of it) an annuity are among those who inflation affects most directly. 

DB Plans

For DB participants, says October Three, all inflation represents a loss; for annuitizing DC participants, though, the real culprit is unexpected inflation. 

For DB plans, they say, inflation does not directly affect the finances of a plan sponsor; however, expected future inflation will increase interest rates, which, in turn, can reduce liability valuations. Inflation will also affect stock market and (especially) bond market performance. 

For DB plan participants, increases in the CPI directly reduce the value/buying power of participant/retiree annuities.

DC Plans

For DC plans, October Three says, an increasing CPI directly reduces the value of a fixed-dollar annuity—and that, in turn, makes the decision regarding whether or not, or when, to annuitize “especially consequential and sensitive to inflation volatility/risk.” 

October Three says that in 2021, non-annuitizing DC participants fared much better than DC participant who annuitized at the start of the year and those DB plan participants who retired.