March 14, 2017 — The primary goal of liability-driven investing (LDI) is to hedge liability cash flows. On the surface, achieving that goal is relatively simple: analyze the projected cash flows and build a portfolio of bonds to provide the funds needed at the time they are needed.

December 20, 2016 — Different liability valuation methodologies can result in a meaningful difference in the measurement of plan health, or the funded status.

March 31, 2016 — Corporate pension plans can’t seem to catch a break: In 2015, despite higher discount rates, and therefore lower liabilities, the aggregate funded status of America’s largest defined benefit plans increased by only 1%-3%.

November 1, 2019 — Multiemployer defined benefit (DB) pension plans, also known as union plans or Taft-Hartley plans, are often described as the smaller and ailing cousins of single-employer DB plans. Indeed, according to the Pension Benefit Guaranty Corporation (PBGC), in 2008 there were approximately 1,500 multiemployer plans covering 10.1 million participants, compared to 27,900 single-employer plans covering 33.8 million participants. As to the health of multiemployer plans, the storm of 2008 inflicted much damage on the plans’ funded status: according to the International Foundation of Employee Benefit Plans, the number of multiemployer plans that were less than 80% funded has quadrupled from 20% to 79%, with 38% of plans being less than 65% funded.

January 1, 2009 — For the last few years, private defined benefit (DB) plans have been enjoying high equity returns, cruising leisurely in calm market waters. According to Mercer, a human resource consulting firm, DB plans of S&P 500 companies experienced asset returns of 13.3% in 2006 and 9.6% in 2007, propelling these plans’ median funded status to 100% in 2006 and 106% in 2007. However, with the 2008 market downturn in equities and alternative investments, DB plans are now anchored solely by traditional fixed income. In these stormy waters, the median funded status of DB plans in S&P 1500 has dropped by almost 25%, from 101% on January 1, 2008 to 78% on October 24, 2008, and pension giants such as Lockheed Martin and CalPERS are reporting year-to-date returns of -20% to -25% as of October 30.

October 1, 2005 — Much has been written about the defined benefit pension plan (DB plan) crisis and how the “perfect storm” of falling interest rates mixed with falling equity asset values caused plans to shift from overfunded to underfunded status within a few years. This simplified explanation implies that higher interest rates (i.e. discount rates) and an improving stock market will naturally fix this problem and the underfunded status to evaporate. Unfortunately, saving DB plans and the threat to employee retirements will be much more difficult than simply raising discount rates or waiting for a cyclical market recovery. Billions of dollars have already been spent by corporations and billions more will inevitably be needed to overcome the growing underfunded pension void created by misguided investment strategies. The damage has been severe with even more danger on the horizon. Makeshift solutions can buy time, but long term structural change will be necessary to return stability to the pension system.

June 1, 2005 — Recent events surrounding the current pension plan crisis are starting to look very similar to the early stages of the 1980’s savings and loan debacle. Legislative response to underfunded plans resembles the deregulation laws instituted to assist struggling S&Ls. Savings and Loan lobbyists imposed political pressure to encourage new laws aimed at aiding the struggling industry, but in the end, essentially increased the cost of the collapse. As with underfunded pension plans, interest rates were a major ingredient in the debacle. S&L insolvency, which had more to due to asset/liability mismatches on balance sheets, led to stopgap interim policies that lowered net worth requirements until interest rates corrected to “normal” levels. These policies were very similar to the discount rate adjustment provided in the Pension Funding Equity Act of 2004, wherein temporary relief is granted to underfunded plans until assets can grow and bring the plans back into funded status.