DB Finances Show Continued Volatility

The volatility that has characterized defined benefit plans’ finances continued unabated through May, says a recent report.

 

DB plan finances improved by some measures as June approached, says October Three in “Markets 2020—DB Finance as of the end of May 2020,” while other factors spelled continued challenges.

 

 

In March, October Three projected that drops in interest rates meant that plan sponsors would contend with lower valuation interest rates under the Highway and

 

Transportation Funding Act of 2014 (HATFA) “for the foreseeable future—past 2030.” They further said that if rates as they stood on March 23 persisted, they expected that (higher) market rates would shorten that period to 2025 or 2026. They also said that asset declines worsened, and that consequently asset-driven minimum funding issues may arise for more plans “perhaps as early as 2021.”

 

In their latest report, October Three says that as in March, they expect that “2020 asset declines may affect minimum funding as early as 2021.” They also anticipate that minimum funding numbers will not manifest in interest rates until 2023. However, they now consider it possible that plan sponsors may “have to live with” lower HATFA valuation interest rates “for the foreseeable future—past 2030.”

 

On the plus side, October Three notes that asset performance “has generally improved since late March—making near-term asset-driven minimum funding issues less likely for some plans.” They report that there has been a rather sharp improvement for equities, which are still down but are off by approximately 11%, a 19-percentage point improvement from two months before.

 

 

Declines in interest rates and assets, October Three anticipates, will either trigger or increase payment of Pension Benefit Guaranty Corporation (PBGC) variable-rate premiums for many plans next year. 

 

 

In this month-end report, October Three reiterates the importance of interest rates to de-risking and the complexity they pose, and the considerations related to interest rates to keep in mind when pondering de-risking. They say that in light of conditions by the end of May, they consider the key factors affecting the decisions regarding settlement to be: