PLANSPONSOR - December/January 2021 - 10

UPFRONT
COVID-19's
Effect on
DB Plans
THE IMPACT OF COVID-19 on the
markets and the economy has been a
setback for U.S. corporate defined benefit
(DB) plans. Much happened in 2020 tied
to the pandemic that has affected DB plans,
notes Goldman Sachs Asset Management
(GSAM) Chief Pension Strategist Mike
Moran. Despite equities bouncing back
since the market crash in March, DB plan
funded levels are down about 2%, year to
date, in general, he says.
" When we run portfolios through
our models, we find it will be hard for
DB plans to hit their expected return
assumptions, " Moran says. " Some plans
had already lowered their return assumptions
during 2020, and we will continue
to see lowering. " Offering a preview of an
upcoming GSAM DB plan review report,
he says the firm expects discount rates to
remain low, which will put more pressure
on expected return assumptions.
" There are many lessons to be
learned, some not new, some to be
relearned, this year, " Moran says. " For
example, the importance of rebalancing.
In March and April, that was the No. 1
question we got from clients, and those
that did rebalance have done well this
year. Plan sponsors should also consider
whether they have the right hedging in
place, because interest rates can go lower. "
Having the right governance in place
is also important, he says. " We've seen
increased interest in OCIOs [outsourced
chief investment officers]. That may
be driven by some organizations not
spending as much time on their DB plan
as they want, " Moran says.
The pandemic could also affect
assumptions DB plans use for funding
and funding needs. According to Douglas
Anderson, founder of Club Vita, an
international provider of longevity data
analytics, the assumptions DB plans use
for mortality can be broken into two bets:
Observe recent history and use what has
happened in the recent past, or-what is
more difficult-decide what to use based
on future expectations. " The approach of
actuaries to DB plans is to make assumptions
about continued improvements, " he
says. " False mortality numbers require DB
plan sponsors to hold more money in their
plans. So predictions of future trends can
have a significant impact on the money
they need to hold in reserve in their plans. "
Anderson suggests that DB plan
sponsors think about future possibilities
and how well they could fund their plan
given different outcomes. " They could
map out a world in which [President-elect
Joe] Biden's goals reduce the longevity gap
and the nation's average ticks upward, "
he says. " Conversely, plan sponsors could
consider a scenario in which recent trends
continue, with a high level of premature
mortality. The difference between the two
scenarios would have a substantial impact
on DB plan funding. " Anderson notes
that these are actions insurance companies
take when considering pension risk
TIDBIT
Pandemic Lowers Medical Costs
The pandemic did what no health expert or innovation has been able to for decades.
A survey of health insurance carriers shows that the illness significantly lowered health
care spending costs this year vs. original 2020 projections for what the average U.S.
employer would pay in employee claims. A factor in this trend has been more American
workers deferring nonessential care during the pandemic.
The following were projected to have decreased by year end:
transfer (PRT) transactions.
For plan sponsors to come up with
appropriate assumptions for mortality,
they have to do the scenario planning, he
says. " They could take an optimistic view,
thinking that frailer people have lost their
lives and the U.S. is left with healthier
individuals. In that case, there would be
lower mortality going forward. In addition,
they could consider changes in
behavior. For example, some individuals
now working from home may exercise
during the time they would have spent
commuting. Simply washing your hands
more frequently improves health. "
But, Anderson points out, data show a
disproportionate impact on longevity due
to where one lives. That is why Club Vita
projects that ZIP-code-based mortality
assumptions are more accurate. In addition,
lower-income people are less likely to
be able to work from home.
" This clearly demonstrates the value
in thinking about micro geographic
units, " he says. " We have data on COVID
instance by county level, and we correlate
that with longevity and life expectancy
figures we have for different ZIP code
areas. " -Rebecca Moore
Dental claims, by 15%
Source: Aon
Vision claims, by 8%
Medical claims, by 5%
10 PLANSPONSOR.COM December 2020 - January 2021
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PLANSPONSOR - December/January 2021

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