MAP-21: The wrong course for pension plans?

Ironically, “the nature of the market movements in the first 6-8 months of the year have benefited those plans that have not adopted a liability-driven investment strategy,” Service said.

“What’s happened,” he said, “is that equity markets went up and interest rates went down, and plans that have adopted these derisking protocols have been selling their equities in favor of more fixed income.

“That’s a good thing, from a long-term perspective for derisking a pension program, but in the short term they’ve been selling equities that have continued to rise. Looking at the results in the first part of year, old-fashioned programs that have not adopted derisking have actually done a little better short-term than those that have adopted a derisking program. It’s an interesting … short-term phenomenon.”

That doesn’t mean, he noted, that LDI is the wrong way to go. “On the contrary, we feel it’s the appropriate way to manage programs over the long term,” he said.

Robert Pozen, nonresident senior fellow of economic studies at the Brookings Institution, noted that while many corporate pension plans are derisking, many public plans “that are essentially unfunded or underfunded have gone into alternative investments heavily.”

Eric Keener, partner and chief actuary at Aon Hewitt, said diversifying into alternative investments may work for some plan sponsors but many of his company’s clients are moving instead into derisking. Removing the risk from equities in favor of the stability of fixed-income investments may mean that companies will need to contribute at a higher rate, but it also reduces the volatility of contributions.

“The more you allocate toward return-seeking assets, the greater the chance the market will move against you, and you’ll need to put more money into the plan. In a down market, it may be harder for you to do that.”

There’s another measure a company can take: contributing its own preferred stock as a way of increasing the size of its plan contribution.

AT&T, for example, did this.

“It believed preferred stock would provide a better return to the pension fund, and it wanted to close its funding gap,” Keener said.

And, of course, companies wanting to end their pension headaches once and for all are “pursuing lump sum windows,” Keener said, offering either the vested population or the entire plan population a lump sum rather than an annuity. “General Motors did that and so did Verizon,” he noted. Ford has, too.

Less radically, Service said plan sponsors can also look at changes to funding ratios.

That’s most commonly done by freezing benefits, he said. Pensioners hate that, so it’s a move with “repercussions,” he said. Still, “a lot of programs have been frozen or closed in the past decade, so it’s more common now to find frozen and closed programs than was the case before the Pension Protection Act of 2006 came into force.” Goodyear Tire and Rubber is about to become the latest company to do so.

Pozen warned last year against companies relying too heavily on MAP-21 to solve their pension funding problems, saying that the 25-year averaging period went “too far,” and that somewhere in the neighborhood of five to 10 years would be more realistic.

Earlier this year, Milliman warned that, should interest rates remain low, keeping discount rates low, the only options open to companies would be strong market returns or larger contributions. In other words, companies that have availed themselves of MAP-21 to reduce plan contributions may have bought themselves some time but aren’t really better off than before.

The retirement system is in crisis but if there’s any good news in this, it might be that the number of workers with pensions has been on a steep decline for decades now. According to the Bureau of Labor Statistics, about 18 percent of full-time private industry employees had a defined pension benefit in 2011 vs. down from 35 percent in 1990.

See also:

• Retirement plan sponsorship, participation grows 
• Quinn says pension panel’s framework is ‘positive’