A more active and informed model of managing pension assets, including managing more assets in-house, could also reduce volatility, which in turn, could reduce potential underfunding of pensions. With less potential to underfund pensions, there may been less of a need for higher premiums which may, in turn, lower the barrier to companies wishing to sponsor pensions.
In 2023, we took note of increasing focus on pensions in the private sector by industry influences such as the Wall Street Journal and JP Morgan and noted the potential for increased interest in pensions by plan participants and employees. Now, a new report by the National Institute on Retirement Security (NIRS) highlights that rise in interest. Their report makes recommendations for private, non-union based, pension plans. Given an interest by public pensions such as CalPERS in how they manage assets to hedge risks, the NIRS recommendations indicate a change towards positively viewing pensions.
We’ve previously reported that younger generations, including Generation Z, those currently entering the workforce, have been turning towards manufacturing jobs. Such a turn may drive interest in defined benefit plans. As we’ve noted before, when more manufacturing jobs enter an area, employees across many industries note an increased interest in the stability of their retirement plan options. Nationwide, there is a notable increase in interest in skilled trade and manufacturing jobs. “Enrollment in vocational programs jumped 16% last year, according to National Student Clearinghouse.”[1]
According to Plan Sponsor, NIRS made “six core policy recommendations: reduce Pension Benefit Guaranty Corporation insurance premium rates; formally recognize risk-sharing plans; provide more flexibility for overfunded plans; allow pre-tax employee contributions; and permit transfers between defined contribution and DB plans.”[2]
As to reducing insurance premium rates, the PBCG charges pension plans two rates per participant. These insurance rates can cost upwards of $600 for each participant to ensure liquidity. Such high rates, some analysts propose, may be discouraging employers from considering pensions. At the same time, the pension benefit guarantee corporation, which had run at a deficit in the 1980s, has been significantly overfunded in recent years. Not only that, but the PBGC has come under scrutiny by Congress for failure to accurately investigate assistance, as with an accidental overfunding of inflated approximately $127 million to Teamsters Central States, Southeast & Southwest Areas Pension Fund, Chicago.[3] This additional scrutiny by Congress may help reduce the need for high premiums.
We also wrote recently about an interest by large pension funds, such as CalPERS, in moving towards the Canadian model of managing assets. That is, a more active and efficient management of pension assets to reduce volatility. “The key takeaway for advisors about the increasing attention to the Canadian model involves the sharp focus on internal investment costs. “On average, Canadian pensions manage 52 percent of their assets in-house, compared with 23 percent for funds outside the country.” That in-house focus allows Canadian pensions to invest in assets that traditionally are more expensive to manage, including real estate infrastructure and commodity-related assets. The total allocated to these real assets was 18%, double what others do.”[4] A more active and informed model of managing pension assets, including managing more assets in-house, could also reduce volatility, which in turn, could reduce potential underfunding of pensions. With less potential to underfund pensions, there may been less of a need for higher premiums which may, in turn, lower the barrier to companies wishing to sponsor pensions.
A turn towards the Canadian model of managing pensions could also be part of another aspect of the NIRS recommendations. The NIRS recommended recognizing risk-sharing plans, where benefits are tied to the performance of the pension plan. Two large state pension systems, those of Wisconsin and South Dakota, currently operate as risk-sharing pension plans.[5] Yet, as public funds, they are largely removed from federal regulations. Private risk-sharing pension plans could obviate the worry over a plan running into underfunded territory, since benefits would be tied to performance. And, additionally, if more aspects of the pension’s performance were managed internally, then risks may be reduced. It’s worth noting that the Canadian model also has as a key characteristic the intention to channel capital toward growth assets so as to hedge liability risks.
[1] https://www.axios.com/2024/04/14/gen-z-trade-school-vocational-training
[4] https://www.bcgbenefits.com/blog/canada-pension-model
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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