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    Pension trends

    Pension trends

    Pension plan funded status, as measured by Insight’s model pension indices, improved during Q3. Although discount rates declined, increasing pension liabilities, growth assets recorded very strong returns.

     

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    Pension news

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    US Corporate Pension Plans in August had the largest monthly funding gain in 17 years

    US Corporate Pension Plans in August had the largest monthly funding gain in 17 years

    Data from Milliman on the funded status of the largest 100 corporate defined benefit pension plans showed a $93bn improvement in August, the largest increase since 2003.1

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    Proposed new rules could limit some ESG investment strategies

    Proposed new rules could limit some ESG investment strategies

    The Labor Department (DOL) has proposed an amendment to the “Investment duties” regulation under the Employee Retirement Income Security Act of 1974 (ERISA).2

    Download the report for the full story.

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    Global Peer Financing Association (GPFA) formed

    Global Peer Financing Association (GPFA) formed

    In July 2020, the California Public Employees’ Retirement System (CalPERS), Healthcare of Ontario Pension Plan (HOOPP), Ohio Public Employees Retirement System (OPERS), and the State of Wisconsin Investment Board (SWIB) joined together to form the GPFA.3

    Download the report for the rest of the pension news.

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    Treasury Department denied request to reduce plan benefits

    Treasury Department denied request to reduce plan benefits

    The American Federation of Musicians and Employers’ Pension Fund, which is reported as having liabilities of $3bn versus assets of $1.2bn, saw its application to reduce plan benefits denied.4

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    Solutions

    With interest rates at historic lows, should pension plans maintain or increase their hedge ratio to protect the funded status against a further fall in rates and to counter the increased liability sensitivity to rate changes, or should they decrease their hedge to benefit from higher rates in the future?


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    If rates fall further, as experienced in Europe and Japan, plans that are not fully hedged to rates would see their funded status deteriorate. Also, with falling rates over the last five years, the sensitivity of a pension plan’s liabilities to rates has gone up.

    DB plans that were not fully hedged would stand to gain as liability values would be expected to fall faster than bond values, improving the plan’s funded status. Such investors would then increase hedge ratios after rates rose and the cost of hedging was cheaper – allowing the plan to then crystallize those funded status gains. 

    1. Watch interest rate forwards: It has become the default for rates to consistently surprise to the downside—reflected by spot rates regularly undershooting forward rates.

    2. Convexity—more to lose than gain? Downside rate risks are amplified by convexity. At low yield levels, interest rate sensitivity is higher for a fall in rates than it is for an equivalent rise in rates.

    Tactically reducing a hedge ratio at today’s lower rate levels may be a viable strategy for certain plans, provided the sponsor can tolerate the downside risks. If not, adaptive or asymmetric hedging strategies that seek to protect downside risk while maintaining upside exposure may be worth considering.

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