New Year’s resolutions thwarted by COVID-19: Now what? 10 tasks for pension plan sponsors

As many of us experience each year, we set New Year’s resolutions, only to have life get in the way of actually accomplishing them. We wrote “10 New Year’s resolutions for pension plan sponsors” a few months ago, but due to all that’s happened in the world since then, it feels like it was years ago. Given the current state of the global economy and markets as a result of COVID-19, what should pension plan sponsors be doing now? In this article we’ve laid out the top 10 items that pension plan sponsors need to focus on now to successfully navigate the current environment.

1. Revisit plan goals and objectives: This remains the number one thing that plan sponsors can and should do, especially in light of the current market environment. Understanding where you’re trying to get to will provide the necessary context for revisiting funding policies, investment policies, and strategies to save costs.

2. Understand your risks: If plan sponsors didn’t do this before, they’re probably forced to do it now. What we’ve seen in the markets has pushed funded status lower and in some cases considerably lower (more than 10%).

For some plan sponsors they need to ask the hard question as to whether or not the pension plan may push them into financial stress or even bankruptcy.

We’re most likely in for a volatile ride in the coming months and possibly years. Understanding how much worse it could get will help sponsors hone in on the right strategies to help them take risk where appropriate to navigate their way back to solid footing in the future.

3. Revisit glide paths, potentially re-risk: The point of a glide path is to incrementally shift into less-risky investments as the pension plan becomes better funded. The reverse though is also true when markets turn badly.

Plan sponsors will need to evaluate the merits of re-risking. Depending on the rigidity of a sponsor’s investment policy statement they may need to re-risk to stay in compliance or amend the policy to react to the new funded status.

4. Review asset allocation and rebalance: For plans that pay out material benefit payments (e.g. in excess of 5% of the assets in their portfolio), decisions may need to be made about how to generate cash to make those payments. These decisions need to be made with careful consideration.

As the need to sell assets arises, plan sponsors need to think through where to liquidate and also to look for ways to rebalance efficiently without giving up potential market exposure that could help if markets rebound to any degree.

5. Explore derivatives to manage risk: One investment tool that plan sponsors need to look at is derivatives. Derivatives can provide a way for plan sponsors to mitigate some of their downside risk; they can also provide an opportunity to accelerate growth when markets rebound.

6. Evaluate Treasuries in your portfolio today: With yields on US Treasuries falling to historic lows, this could be a good time to take the corresponding positive returns and cash them in. These gains can then be reinvested in other asset classes that may present good buying opportunities in today’s environment.

7. Make contributions (or not!): With the recent passage of the CARES Act, plan sponsors have the ability to delay any required contributions otherwise due in 2020 to January 1, 2021. For companies that have a significant drain on cash, this is welcomed relief.

For companies that can afford it, this may be a good time to buy into the markets to hopefully realize positive returns when the markets rebound. Consider contributing your monthly benefit payments so that you do not need to sell assets at depressed values in order to raise the cash necessary to make payments.

8. Understand future contribution requirements and financial implications: Because of the way that the timing rules work for pension plans, most plan sponsors won’t see the effects on required contributions from the recent market events until 2022. Unless further funding relief is granted, plan sponsors can expect to see substantial increases to their required contributions over the next several years.

It’s important to know what those amounts could be based on the current market environment and to be able to plan accordingly. The financial implications to balance sheets and income statements will come sooner.

Understanding the possible increases to balance sheet liabilities and pension expense will also loom large as the year progresses on.

9. Integrate your contribution and investment policies: Plan sponsors need to align their contribution and investment strategies to provide optimal outcomes.

For example, a company that is struggling to get through the current economic turmoil may want to preserve cash (via the CARES Act relief) and invest significantly in the equity markets rebounding as way to come out on the right side of the current crisis.

There are ways of accomplishing this while still protecting some of the downside risk through the use of derivatives (see #5).

10. Ensure plan administration systems are robust: With many companies working remotely, is a plan sponsor’s benefits team still able to operate effectively? Are they able to process benefit election forms, answer participant questions, and ensure monthly benefit payments are made on time?

This is a great time for plan sponsors to evaluate whether they have the right systems in place to make sure that in the future they don’t run into any operational issues.

For some plan sponsors, they may realize that having an outsourced arrangement focused on plan administration would make sense for them to mitigate any risks from disruptions like the ones we’re currently experiencing.

Bonus: Revisit retirement program design – All it takes is a significant downturn in the markets to highlight the vulnerability of participants’ defined contribution accounts. With significant market downturns, older participants may not be able to retire as they had originally planned.

Having a well-designed, and well-managed retirement program can help to provide the opportunity for lifetime income that would not deter an employee from staying on track with their retirement plans. This was always the benefit of defined benefit plans. For companies with defined contribution plans, well-designed target date fund strategies are reportedly doing better than the returns from DIY investors within the plan.

When we find ourselves in challenging times plan sponsors need to pay special attention to their pension plan. Focusing on the short and long term goals and objectives will ensure that sponsors can adapt appropriately to changing conditions to improve their potential funded status outcomes in the months and years ahead.

Michael Clark is Managing Director and Consulting Actuary with River and Mercantile and consults on all aspects of financial risk management for defined benefit plans as well as retiree medical plans and defined contribution plans. He also has led numerous clients through pension risk transfers as well as other complex, strategic pension projects. Michael leads River and Mercantile Solutions’ business in the West as well as Business Development for the US. He currently serves as President for the Conference of Consulting Actuaries. michael.clark@ riverandmercantile.com

Tom Cassara is a Managing Director in River and Mercantile’s New York office and Head of the US business. In his role he consults with institutional clients across the investment and actuarial spectrum. This includes defined benefit, defined contribution, not for profit and retiree medical. Tom works with clients to bring his 30 years of experience across a wide range of institutional organizations to provide custom solutions. thomas.cassara@ riverandmercantile.com