The Markets October 4, 2012

Corporate Pension Funding Rises for Second Month

According to BNY Mellon, the funded status of U.S. corporate pensions increased for the second straight month to 75%, the first two-month winning streak since February.
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The funded status of the typical U.S. corporate pension plan increased 1.8 percentage points in September, benefiting from a decline in liabilities as interest rates rose, the BNY Mellon Pension Summary Report for September 2012 said. 

Assets for the typical plan increased 1.7% as stock markets in the U.S. and internationally continued to rally. Liabilities for the typical plan declined .7% as the Aa corporate discount rate rose six basis points to 3.78%. Plan liabilities are calculated using the yields of long-term investment grade bonds; higher yields on these bonds result in lower liabilities.

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Year to date, the funded status of the typical U.S. corporate plan is down .3 percentage points.

“Pension plans have been benefiting all year from rising equity markets but have had their gains offset by persistent low interest rates that have sent liabilities higher,” said Jeffrey B. Saef, managing director  of BNY Mellon Asset Management and head of the BNY Mellon Investment Strategy and Solutions Group.

 

Data & Research October 4, 2012

Employers Not Confident in Employee Retirement Readiness

Despite efforts to improve defined contribution (DC) plan participation and savings, employers lack confidence in the retirement readiness of their employees.
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The Towers Watson survey of 371 U.S. employers that offer a 401(k) plan as their primary DC retirement plan revealed only one in five respondents (22%) believe employees generally make informed decisions about their retirement savings, and only 26% believe their employees have realistic expectations about what DC plans can provide. Nearly one-half of respondents (48%) expect a greater number of older workers will ultimately delay retirement.   

This lack of confidence is despite the fact that employers have made successful efforts to increase employee participation and deferral rates. More than half of respondents (56%) reported employee participation levels at or above 80% this year, compared with 50% two years ago. The higher participation rates are primarily the result of employers using automatic enrollment, with nearly two in three respondents (65%) now using this feature, compared with 51% in 2009.   

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To encourage adequate participant savings rates, 71% of those that use automatic enrollment also use auto escalation, which allows a gradual increase in contribution levels over a certain period of time. Employers are also becoming more transparent about fees, with more companies now charging participants direct, equal-dollar recordkeeping fees. One-third of respondents now pay recordkeeping fees through revenue sharing, which represents a decline from 42% in 2009.

The survey also found the average number of investment options offered in a DC plan is decreasing. The number of employers offering 20 or more options declined from 32% in 2010 to 24% this year. Nearly seven in 10 (69%) respondents offer between 10 and 19 investment options. Nearly one-half of respondents now offer a brokerage window as an option.  

 

The use of lifetime income distribution options (i.e., annuities) is low. Only 6% of respondents offer a lifetime income distribution option; of this group, 82% report that less than 5% of participants elect the annuity option. Forty-five percent offer the option only at the time of retirement, and the plan is responsible for providing the lifetime income distribution.  

While nearly three-fourths of respondents (74%) said the most prevalent reason for offering a DC plan is to provide their employees with an adequate retirement at a reasonable age, more than half of the respondents cited benefit competitiveness, benefit plan cost, and attraction and retention as the top three issues driving plan design.  

The survey report can be found at http://towerswatson.com/research/8056.

 

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