PLANSPONSOR - August/September 2020 - 41

DB FOCUS
means for tax deductions or whether the
CARES Act is talking about required or
voluntary contributions, " Donohue points
out. " It seems like there are different
tracks for deadlines for taxes, for PBGC
[Pension Benefit Guaranty Corporation]
purposes, and for IRS minimum funding
purposes. It would be nice if we could get
those straightened out. "
" Many sponsors were hoping for
a lot more relief, but that didn't come
through, " says Joseph Gamzon, senior
director of retirement for consultants
Willis Towers Watson, in New York City.
" I haven't seen many companies planning
to take advantage of it. "
In terms of funding ratios alone, DB
plans are not faring too badly. Even though
the public health aspects of the COVID-19
pandemic are only deteriorating as 2020
wears on, the speed and extent of government
aid have fostered a rapid recovery in
the financial markets. By early August,
assets in S&P 500 company DB plan
portfolios had managed an estimated 4%
gain from the start of the year, reaching
an estimated record high. Still, the Fed's
moves to suppress interest rates swelled
the estimated value of benefit obligations
by 6%, leaving aggregate estimated
funding at 86%, down 1 point for the first
eight or so months of the year.
A rising stock market does not end
the pressure, however. Sponsors still have
to maintain their plans with periodic
contributions, in the face of some of the
toughest economic conditions on record.
" This is no surprise, but most companies
are realizing that 2020 is going to
produce a lot of extraordinary events,
and cash flow management is what's on
people's minds, " Clark observes. " Some
have made their regular contributions,
while others have put on the brakes and
are monitoring the situation. "
" It's not as though the current
conditions have devastated pension
plans in particular, " says Eric Keener,
senior partner and chief actuary of
retirement solutions at Aon in Norwalk,
Connecticut. " It's that companies might
be feeling financial stress generally, and
they have to make pension contributions
when they might need the capital elsewhere
in their business. "
The cost and financial risk of
providing a DB plan have risen steadily
for years, and, accordingly, sponsors have
closed the plans in large numbers. The
Department of Labor (DOL) reports that,
between 2005 and 2017-the time of its
latest tally-the count of DB plans other
than the cash balance variety fell 37% to
28,000. The decreases were about equal
for larger and smaller plans.
Over the same period, however,
contributions to DB plans climbed 65%,
to $117 billion in 2017. Some of that rise
was brought on by inflation, but much was
attributable to pension math: The 10-year
U.S. Treasury bond yield started 2005
at about 4% and meandered lower. This
March, in fact, it crossed under 1%. Lower
interest rates translate into higher valuations
on pension benefits and must be met
with larger contributions from sponsors.
HEROES Act: Still to Come
In mid-summer, Congress was struggling
to reach an agreement on the
proposed HEROES (for Health and
Economic Recovery Omnibus Emergency
Solutions) Act, and the pension industry
is hoping for more substantive relief.
Since the global financial crisis, through
several different legislative provisions, DB
plans have been able to use above-market
interest rates to value their benefit obligations.
" What may be in the HEROES
Act is an extension of interest rate stabilization
through 2030, and that would
produce lower levels of liabilities and
lower contribution requirements, " says
Clark. He adds that the HEROES Act
might also allow sponsors to stretch
contributions on past underfunding to 15
years, from the current seven.
" There were some disruptions to DB
plans in the crisis of 2008 and 2009, "
says Byron Beebe, global retirement and
investment market leader for retirement
solutions at Aon in Cleveland. " But what
Lower interest
rates translate
into higher
valuations on
pension benefits
and must be
met with larger
contributions
from sponsors.
has hurt them more are interest rates
that continue to go lower than anyone
thought possible. " Since these plans were
first put in place, near-zero interest rates
have made providing a dollar's worth of
future benefits, and maintaining fund
levels, much more expensive-and that
ignores the punishing premiums for
PBGC insurance coverage.
" Sixteen percent of large plan sponsors
offered DB plans to salaried new
hires in 2019, " Beebe says, referring
to Aon's benefits database. " They have
thought hard about these and want to
keep and fund their plans. Then you
throw the COVID-19 crisis on top of that.
What these organizations want is more
time. " -John Keefe
Postscript: On August 13, legislators left
Washington for summer recess. Voting on
bills in the interim is possible but unlikely,
in view of the added distraction of party
conventions to nominate presidential candidates.
As to the HEROES Act, Senate
Republicans and Democrats had advanced
options on its main provisions-i.e., further
economic support for America's workers,
businesses and health care system-with
little progress, much less the finer points of
DB pension relief. To learn whether Congress
will give them the time they need, DB sponsors
are going to have to wait a little longer.
PLANSPONSOR.COM August - September 2020 41
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