{"id":1315,"date":"2014-12-02T18:08:44","date_gmt":"2014-12-02T23:08:44","guid":{"rendered":"http:\/\/pensionblog.com\/?p=1315"},"modified":"2014-12-02T18:08:44","modified_gmt":"2014-12-02T23:08:44","slug":"db-plan-sponsors-should-prepare-now-for-higher-year-end-liabilities","status":"publish","type":"post","link":"https:\/\/viaactuarial.com\/2014\/12\/02\/db-plan-sponsors-should-prepare-now-for-higher-year-end-liabilities\/","title":{"rendered":"DB Plan Sponsors Should Prepare Now for Higher Year-End Liabilities"},"content":{"rendered":"

The combination of lower discount rates and new mortality tables will dramatically increase pension plan liabilities and decrease DB plans\u2019 funded status for December 31, 2014 financial reporting. Using the November 2014 Citigroup Pension Liability Index (CPLI) and Citigroup Pension Discount Curve (CPDC) as proxies, pension accounting discount rates are down by almost 90 basis points since December 31, 2013.<\/p>\n

Fortunately, many plans have experienced solid investment returns so far during 2014. This will take some of the sting out of the liability increases, but it likely won\u2019t be enough to entirely offset the effect of lower interest rates and the new mortality tables. The higher liabilities will affect both the year-end funded status of the plan and also the 2015 pension expense calculation.<\/p>\n

Discount Rate Analysis<\/span><\/strong><\/p>\n

In the chart below we compare the CPDC at three different measurement dates (12\/31\/2012, 12\/31\/2013, and 11\/30\/2014). We also highlight the CPLI at each measurement date. The CPLI can be thought of as the average discount rate the CDPC produces for an \u201caverage\u201d pension plan.<\/p>\n

\"Citigroup<\/a><\/p>\n

The orange arrows in the chart highlight the trend in yield curve movement and show how rates are almost back to their 2012 lows at all points along the spectrum. This means that nearly all plans will feel the negative effect of lower discount rates.<\/p>\n

Net Effect on Balance Sheet Liability<\/span><\/strong><\/p>\n

Depending on the starting funded status, the change in pension liabilities and assets can have a leveraging effect on the reported net balance sheet asset\/liability.<\/p>\n

Below is a simplified illustration for a plan that was 80% funded on 12\/31\/2013, where we assume a 10% increase in pension liability during 2014. We then compare the funded status results under two asset scenarios: (1) Assets 5% higher than 12\/31\/2013 and (2) Assets 8% higher than 12\/31\/2013.<\/p>\n

\"11302014<\/a><\/p>\n

In both cases, the funded status of the plan decreases. There\u2019s also a magnified increase in the unfunded balance sheet liability because it\u2019s such a leveraged result. This amount increases by 30% and 18%, respectively, in the two sample scenarios.<\/p>\n

Conclusions<\/span><\/strong><\/p>\n

So, what should plan sponsors be considering over the next month as we approach year-end? Here are a few ideas.<\/p>\n