The Markets October 30, 2015

Where Pension Plans Parked Assets in 2014

Fortune 1000 companies with frozen pension plans went conservative in 2014, while open plans took a bit more risk.
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Towers Watson’s analysis of 2014 fiscal year-end asset allocations takes a detailed look at pension disclosures in Fortune 1000 plan sponsors, divided into three categories: frozen pension plans, closed pension plans and open plans. Two thirds (68%) had a pension plan categorized as either frozen or closed, while 32% maintained open defined benefit (DB) plans.

Asset allocations by plan status demonstrate a relationship between plan status and investment risk, with the correlation strongest on an aggregate basis. Sponsors of frozen plans invested more than half their total assets in conservative, lower-variance investment instruments, such as cash and debt, whereas sponsors of plans where some or all workers continued to accrue benefits (closed and open plans) seemed more inclined to take on riskier investments.

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The overall funded status (on a plan sponsor financial accounting basis) of DB plans worsened over 2014, driven primarily by declining interest rates that pushed plan obligations higher. De-risking approaches, such as liability-driven investment (LDI) strategies that hedge against interest rate movements, played an important role in buffering funding declines. Plans with higher allocations to fixed-income assets had smaller funding losses or even modest gains versus plans with higher allocations to equity. On average, plans whose funded status improved invested more than 50% of their assets in debt.

Looking at a consistent sample of sponsors, on average, the total held in public equity declined nearly 4 percentage points from 2013 to 2014. Over the same period, allocations to debt instruments increased at the same pace.

In 2014, almost 10% of these DB plan sponsors held assets in the form of company securities, and the allocations averaged 4.6% of pension assets among those that did.

Towers Watson based its findings on the pension disclosures of 533 Fortune 1000 U.S. plan sponsors.

The full report can be downloaded from the Towers Watson website.

Compliance October 30, 2015

Social Security Changes Hammered Out in Budget Deal

There is a concept in biology called punctuated equilibrium, in which long periods of stability are interrupted, rapidly and unpredictably, by meaningful change. It’s an apt metaphor for discussing Social Security, especially after a week like this. 
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Changes to Social Security are a famous sticking point in American politics, but some complex budgetary maneuvering that took place this week in Washington shows rapid compromise is still possible, even when it comes to changing the benefits collected by American retirees.

This week, Congress and President Obama signed onto a two-year federal budget deal, negotiated by a suddenly deposed and outgoing House Speaker, that makes fairly significant changes to the way people file for Social Security. The Social Security system is not fundamentally changing, experts were quick to point out, but the text of the deal reached by Washington’s top power brokers does alter the “file and suspend” system, among other changes.

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Industry media and practitioner consensus seems to be that the budget deal could ultimately reduce the amount of Social Security collected by a given individual or couple, but provisions of the deal are also likely to at least maintain, if not improve, the viability of the Social Security System.

For example, Section 813 outlines “new and stronger penalties” for those found guilty of conspiracy to commit Social Security Fraud, and Section 824 allows for Social Security to enter into information exchanges with payroll providers to ensure the accuracy of benefits due and eligibility of claimants.

NEXT: End to file and suspend? 

The relevant changes for retirement planning professionals who give advice about Social Security are in Subtitle C of Title VIII, “Protecting Social Security Benefits.” It deals with a variety of matters related to the amount of benefits people receive from Social Security and how they file, starting with Section 831, detailing the “closure of unintended loopholes.”

The file and suspend method is a common strategy shared by advisers with clients. It allows the higher-earning spouse to claim benefits at full retirement age and voluntarily suspend the receipt of those benefits until a later time; this provides the lower earning spouse the opportunity to claim and immediately receive spousal benefits.

The budget bill still allows for individuals to suspend payment of benefits; however, "no monthly benefit shall be payable to any other individual on the basis of such individual’s wages and self-employment income; and no monthly benefit shall be payable to such individual on the basis of another individual’s wages and self-employment income.’’

The changes apply to individuals who attain age 62 in any calendar year after 2015, and are effective for benefits payable for months beginning 180 days following enactment of the legislation.

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