As a trusted advisor, we stand ready to guide Plan Sponsors through the complexities and everchanging landscape of pension plans. Below find valuable updates from our dedicated Defined Benefit Business Council.
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Cash Balance Plans
Cash balance plans continue to be an area of growing interest and have been a large area of new plan growth. Cash balance plans now represent more than half of all defined benefit plans in existence with approximately 13,000 new plans adopted in the last five years.1
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Why the growing interest?
- A modern cash balance acts like a 401(k) plan with the advantages of a defined benefit plan.
- Cash balance plans can provide a way for highly compensated individuals to defer significantly more income into a qualified retirement vehicle compared to a 401(k) plan alone (~$200,000 + per year for certain individuals).
- Cash balance plans avoid the volatility typically associated with traditional defined benefit pension plans.
- Cash balance plans can be designed to consider the risk profiles and savings needs of individual participants and/or groups of participants.
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Source: 1October Three: Cash Balance Market Snapshot, February 2023
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Traditional Pension Plans
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The pension discount rate increased significantly during the third quarter by 0.73% to finish at 5.65%. The discount rate is now at its high for calendar year 2023 and is up 0.63% on a year-to-date basis.
- We have also surpassed last year’s high-water mark of 5.50% which was reached in October 2022.
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This is a positive for Plan Sponsors as higher discount rates reduce the present value of liabilities, likely leading to funded status improvements.
- Liability Driven Investing (LDI) can provide help to lock-in those gains. Discover how below.
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Pension Risk Transfer and Plan Termination
The 2023 Pension Risk Transfer (PRT) market continues to be very strong as funded statuses continue to improve.
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- PRT activity in the U.S. for the first half of 2023 came in at $22.5 billion, which is 28% higher than what we saw in 1H2022.2
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The size of transactions is also increasing; however, this was partly driven by three large transactions in 1H2023 of over $1 billion each. AT&T was one of these at $8.1 billion.3
- Annuity purchase premiums generally decreased in 2022 from 2021. Premiums have continued to decline in 2023, albeit at a slower rate.4
- If you are considering a PRT transaction in the near future, be sure to understand the plan’s exposure to less liquid investments. For more information on why, view this brief 4-minute video below.
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As required by SECURE 2.0, the Department of Labor is currently reviewing its Interpretive Bulletin 95-1, guidance released in 1995 that relates to the fiduciary standards under ERISA when selecting “the safest available” annuity provider when executing a Pension Risk Transfer transaction. Changes to this guidance may significantly impact the annuity placement market.5
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Sources: 2LIMRA: U.S. Pension Risk Transfer Sales Jump 31% in Second Quarter 2023, August 23, 2023.,3
Pension & Investment Magazine’s Pension Risk Transfer Center, October 25, 2023.,4October Three Annuity Purchase Update, September 2023., 5Washington taking aim at pension risk transfer market, but is anything broken?”, Pensions & Investments, September 6, 2023.
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Municipal Plans
ASOP 4 (“Actuarial Standards of Practice #4”): This standard of practice for actuaries has been updated and directs actuaries to provide more robust information around risk, including investment risk and its impact on the plan’s actuarial determined contribution. The new standards will impact plans starting with their July 1, 2023 valuation.
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This report is intended for the exclusive use of clients or prospective clients (the “recipient”) of Fiducient Advisors and the information contained herein is confidential and the dissemination or distribution to any other person without the prior approval of Fiducient Advisors is strictly prohibited. Information has been obtained from sources believed to be reliable, though not independently verified. Any forecasts are hypothetical and represent future expectations and not actual return volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. The opinions and analysis expressed herein are based on Fiducient Advisor research and professional experience and are expressed as of the date of this report. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is risk of loss.
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