This year, pension plans have a lot on their plate, between recent increases to PBGC premiums, changes to the mortality tables used to calculate liabilities, and potential corporate tax reform by the Trump administration.
To this end, many employers are seeking to lower their participant headcount by cashing out terminated vested participants and buying annuities for current retirees through insurance companies. In addition, more companies are deciding to “fund up” their pension plans by making additional contributions above the minimum requirements.
Aided by the prevailing low interest-rate environment, Verizon, Delta Air Lines and FedEx issued debt earlier this year, using the proceeds to partially fund additional pension contributions above the minimum required for 2017.
Just this month, Kroger outlined its intention to purchase annuities for around 12,000 current retirees and increase plan contributions to $1 billion for 2017 to improve the funded status of its pension plan. In addition, it will offer cash-out options to 25,000 current participants.
In general, pension liabilities rose 5.88% in the second quarter, bringing the increase to 7.37% so far this year. This increase for the quarter ended June 30 was driven by a flattening Treasury yield curve as the 30-year Treasury fell 18 basis points, driving the Citigroup Pension Liability Index to fall to 3.87% in the second quarter from 4.12% in the previous quarter.
As a result, most pension plans likely saw their funded status decline in the second quarter. That said, clients with LDI strategies in place may have experienced a more modest decrease in plan-funded status, as long-duration fixed-income and other interest-rate hedging assets outperformed risky assets.
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