February 7, 2014

Why MEPPs Should Ignore This Statement: “2013 Was a Great Year for Pensions”

Thank you, 2013, for all the good news on pension plan funding levels and investment returns.  It looks like all our problems are over.  But, understanding that this is the world of pensions, will it surprise you if I say that it is not as simple as that – at least not for multi-employer pension plans (MEPPs)?

Yes, 2013 was good, and for two reasons:

  1. Stock markets performed well, and did so pretty much across the world. Even when we allow for sizeable non-equity investments and a less stellar year for bonds, we still see plans posting returns around the 20% mark (depending on their actual asset mix.) And, yes, that is the case in the MEPP world, too. But, as those familiar with MEPPs know, actuaries do not typically use market values in their valuations. Instead, they use a smoothed value, which can mean that the return for 2013 would likely be somewhere in the 8-9% range. Still positive, but not worthy of headlines. The full return will come through over time as the smoothing method unwinds, provided of course we don’t have losses in future years to offset it.  
  2. Interest rates gradually crept up during 2013, and that reduces liabilities as disclosed for solvency and accounting. So those changes, plus the market returns, are driving funding levels in a typical single employer plan to better levels than we have seen for some time and, indeed, solvency and accounting deficits are significantly reduced if not eliminated altogether. So what’s the problem? Well, many MEPPs are exempt from solvency, and single employer accounting rules don’t apply to employers sponsoring MEPPs. So it’s a bit like saying low interest rates are great for mortgage repayments – but if you don’t have a mortgage, you couldn’t care less.

We all remember fondly the days before the recession, and we look for signs that those days are returning. But take the headlines you see with a skeptic’s pinch of salt.

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