The Markets December 13, 2019

Carbon-Sensitive Portfolios Perform as Well as Those That Aren’t

S&P studied companies demonstrating three levels of carbon sensitivity and found that all three held up in terms of stock performance; furthermore, S&P says these companies are well managed.

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Since 42% of investors in a study by Schroders said performance was a primary concern in sustainable investing, S&P decided to investigate whether carbon-sensitive companies perform as well as those that are not sensitive to greenhouse gas emissions.

S&P considered three levels of carbon sensitivity and found companies at all three levels performed as well as those not sensitive to carbon pollution. In fact, as S&P notes in its ‘Trucost’ of Climate Investing Report, “several academic studies document that companies with lower carbon emissions have higher profitability than companies with higher emission activity. Highly profitable firms are usually well managed and have the resources to adopt proactive environmental strategies as a way to decrease regulatory liabilities. In addition, optimizing energy use reduces operating expenses and improves profitability either through the use of new energy-efficient equipment or adopting energy conservation policies.”

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S&P took its study a step further to see whether other activities that generate pollution, such as air pollution, excessive water use and volume of waste generated, have an impact on stock returns. S&P found that they did not directly impact returns.

S&P concludes that “incorporating carbon intensity in a stock selection process does not detract from portfolio performance. All three carbon sensitive portfolios produce comparable returns to the baseline portfolio.”

At the 2019 PLANADVISER National Conference, speakers said that retirement plan sponsors are looking for advisers with environmental, social and governance (ESG) experience. They said there are many more ESG-labeled products on the shelf today, and the ESG theme is being programmed into many funds and investment products that do not explicitly carry an ESG label. Additionally, plan sponsors are running analyses of their existing fund menus to rate them from an ESG perspective, and using this type of thinking to help steer decisions about tailoring the investment menu.

The speakers added that some sponsors even think that ESG can drive outperformance.  In addition, a recent Morningstar report found that 72% of investors are interested in ESG investing.

Compliance December 13, 2019

2021 Pension Mortality Improvement Rates Published by IRS

IRS Notice 2019-67 specifies updated mortality improvement rates and static mortality tables to be used for defined benefit pension plans during 2021.

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The IRS has published Notice 2019-67, “Updated Mortality Improvement Rates and Static Mortality Tables for Defined Benefit Pension Plans for 2021,” and called for public comments on its methods for setting certain mortality assumptions. 

The Notice specifies updated mortality improvement rates and static mortality tables to be used for defined benefit pension plans under Section 430(h)(3)(A) of the Internal Revenue Code (Code) and Section 303(h)(3)(A) of the Employee Retirement Income Security Act (ERISA). These updated mortality improvement rates and static tables apply for purposes of calculating the funding target and other items for valuation dates occurring during the 2021 calendar year.

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The IRS Notice also includes a modified unisex version of the mortality tables for use in determining minimum present value figures under Section 417(e)(3) of the Code and Section 205(g)(3) of ERISA. The IRS explains that these will apply to distributions with annuity starting dates that occur during stability periods beginning in the 2021 calendar year.

By law, the Department of the Treasury is required to revise the mortality tables used under Section 430(h)(3)(A) at least every 10 years, “to reflect the actual mortality experience of pension plans and projected trends in that experience.”

A Call for Comments

As recounted in the IRS Notice, on October 23, 2019, an IRS committee released the “Pri-2012 Private Retirement Plans Mortality Tables Report.” The mortality tables in that report are based on a study of mortality experience of private-sector defined benefit pension plans in the United States covering calendar years 2010 through 2014.

Notice 2019-67 calls for new public comments as to whether there are other studies of the actual mortality experience of individuals covered by pension plans and projected trends in that experience that should be considered for use in developing mortality tables for future use under Section 430. For example, should the mortality tables under Section 430(h)(3)(A) be developed taking into account studies that examine the mortality experience of individuals covered by large public-sector pension plans, such as the IRS 2010 Public Retirement Plans Mortality Tables Report?

In addition, comments are requested as to which of the tables in the Pri-2012 Mortality Tables Report “should be used to develop Section 430(h)(3)(A) mortality tables, if the Pri-2012 Mortality Tables Report were to be used for that purpose. For example, should the Section 430(h)(3)(A) mortality tables include separate retiree and contingent survivor tables, as are provided in the Pri-2012 Mortality Tables Report?”

Comments must be received by February 28, 2020. Taxpayers may submit comments electronically via the Federal eRulemaking Portal at www.regulations.gov.

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