As 2023 rolls away with its double digit market returns and roller coaster ride of interest rates, it leaves pension plan sponsors with some very unique opportunities for 2024. Many sponsors will be considering (and many consultants will be talking about) items like offering a lump sum window to vested terminated participants or looking to purchase annuities for some if not all of their retirees. We also expect plan sponsors with frozen pension plans will be considering a full plan termination (those that are should consider catching up with our series on plan termination preparation). We expect the ideas above to be fairly mainstream in 2024. In addition to those items, below we look at two different ideas that many sponsors haven’t considered.
- Protection from further interest rate falls – Interest rates, as measured by the 10-year treasury, started 2023 a little over 3.5%, then raced up to 5.0% during the year only to fall back to around 3.8% as of the end of the year. For most plans looking to further hedge a downfall in rates, the typical consideration is to trade growth seeking assets (e.g. equities) for more liability matching assets (e.g., long credit fixed income) to hedge a further fall. This results in a lower expected return but also a decrease in funded status risk.
There are other ways that a pension plan can hedge against interest rates. Specifically, consideration should be given to utilizing interest rate swaptions to protect on the downside in order to allow growth assets and expected returns to remain in place. Interest rate swaptions can be custom designed to meet each plan sponsor’s needs and will allow a sponsor to separately decide between the level of funding risk desired and the expected return of the overall portfolio. These types of strategies allow for separate decisions in terms of interest rate risk and expected return and not a trade-off between the two objectives.
- Expanding the group for lump sums – Most plan sponsors are familiar with offering a one-time window option for a lump sum offering to former vested participants who haven’t yet retired. However, the group could be expanded to include active participants older than age 59.5 and also retirees. Many will argue that including retirees may increase costs through the possibility of anti selection, however we believe this can be mitigated. For all the same reasons why a lump sum campaign targeted towards vested terminated participant makes economic sense, the same logic applies to these other groups as well.
While other companies deliver black and white canned strategies, we add dimension and full color analysis to our solutions. Our clients come to us for out-of-the-box thinking and innovative solutions for their pension and investment portfolios. For more information on solutions that would make sense for your specific situation, please reach out to us via our website at www.agilis.llc.
