PLANSPONSOR - October-November 2022 - 15

with very different rates and resulting
premiums.
This difference may become especially
acute next year, as the most current
rate increases will be reflected in the
spot rate, whereas the alternative method
will only just start catching up. Plans
locked in to using the alternative method
may find themselves paying higher
premiums until the 24-month average
fully reflects all of the rate increases, or
until their five-year window runs out,
whichever comes first.
On September 1, pension consultant
October Three issued an alert recommending
that plan sponsors able to make
a change before the October deadline
should do so and choose the spot method.
The alert said making the change now
could benefit plan sponsors for next year.
" For 2023-which will be based on
either a December 2022 spot rate or a
24-month average ending (depending
on the elected look-back month) August
through December 2022-if the current
trend holds, using the standard method
produces a significantly higher valuation
rate/lower UVBs [unfunded vested benefits]/lower
variable-rate premiums. The
movement in rates this year has been
the sharpest since 2008, making the
PBGC method elected for 2023 the most
momentous decision sponsors have faced
under current law, " the alert said.
The October Three alert also noted
that, for making the change by the deadline,
the five-year lockup period would
run from this year to 2027, which could
have specific benefits.
Plan sponsors already have had a
pretty good indication that rates will rise
through 2023. For those that made the
election this year, two of the five years
are accounted for. If interest rate regimes
change significantly in 2024 or beyond,
October Three says, those plans would be
in their countdown period, which could
serve as a good hedge against uncertainty.
Sponsors that are waiting until 2023 to
make a change lose a year of knowing
what rates might be. -Bailey McCann
TIDBITS
Risk Abatement
IBM has transferred $16 billion worth of defined
benefit pension plan obligations to Prudential
and MetLife in one of the biggest pension risk
transfer deals ever. The pension plan had a
funded level of 112% as of the end of 2021.
Top Spenders
A REPORT from the Public Retirement
Research Lab and J.P. Morgan Asset
Management found that public-sector
workers
whose
primary
retirement
account is a defined benefit plan tend to
spend a higher ratio of their earnings in
retirement than do those with a defined
contribution plan.
The research lab is a collaboration
between the Employee Benefit Research
Institute and the National Association
of Government Defined Contribution
Administrators. The two organizations
combined their datasets on public
employees participating in DC, DB and
hybrid plans with J.P. Morgan's data on its
customers' income and savings, which that
firm collected by monitoring cash flows in
and out of savers' J.P. Morgan accounts.
When the researchers limited their
combined data to household participants
of working age-i.e., 25 through 64-
they ended up with 36,690 households.
That at least one household member had
a J.P. Morgan bank account was required;
if other household members banked elsewhere,
the total household size was still
counted as one.
The study, written by Craig Copeland
of EBRI, Kelly Hahn of J.P. Morgan
Asset Management and Matt Petersen of
NAGDCA, found that, across all income
quartiles, DB plan participants spent
a higher ratio of their income than did
participants in DC or hybrid plans. At
the lowest quartile, DB participants
spent 117% of their income, vs. 108% for
At the lowest
quartile, DB
participants
spent 117% of
their income,
vs. 108% for nonDB
participants.
non-DB participants, and, at the highest
quartile, DB participants spent 90%, vs.
83% for non-DB participants.
The authors speculated that this gap
likely exists because workers with a DB
plan have a retirement plan that is based
on a formula, rather than market performance,
and is perceived as lower risk.
This reduced risk makes them feel more
comfortable spending larger percentages
of their total income.
The study found essentially no differences
in the two sets of savers' spending
habits. -Paul Mulholland
PLANSPONSOR.COM October - November 2022 15
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