DB plans are better funded but expect returns to slump

Defined benefit pension plans are lowering their long-term return expectations, according to research from U.S. consulting firm, NEPC.

According to the NEPC’s survey of corporate and healthcare DB pensions, a third of plan sponsors now have a return assumption of six per cent or less, compared with 20 per cent that said the same in 2017.

Further, in 2019, 21 per cent of plan sponsors said they had a return expectation of 7.5 per cent or higher, whereas 33 per cent said so in 2017.

The survey also found a majority (84 per cent) of plan sponsors think a recession is likely in the coming three years. Half of plan sponsors that said so expect it to be in 12 to 18 months from now. Meanwhile, 58 per cent of plan sponsors said they’re bearish on the stock market and 63 per cent said they expect discount rates to hold steady or dip lower in the next year.

When asked about their top worry surrounding their portfolios, 30 per cent of plan sponsors cited geopolitical tensions, 29 per cent said political uncertainty and 28 per cent said actions by the Federal Reserve.

While uncertainty mounts, plans do have a healthier funded status on average today. Close to 60 per cent have a funded status higher than 90 per cent, compared to 46 per cent of plans that could say the same in 2017. The survey noted this improvement is off the back of plans embracing liability-driven investing, glide paths and liability reduction strategies. Approximately 75 per cent of plans with an above 90 per cent funded status said they’ve used LDI.

“The correlation between strong funded status and the use of LDI illustrates that risk management in the form of LDI works to reduce funded status volatility in a declining interest rate environment,” said Brad Smith, partner in NEPC’s corporate defined benefit group, in a press release. “While the use of LDI has remained consistent with prior years, we’ve found that the allocations to LDI have increased significantly over the past two years and are a key contributor to protecting funded status in this market environment.”