In last week’s blog, I gave my thoughts on where the group insurance industry is headed in 2023. Today, I look at the retirement market, specifically public pensions and multi-employer pension funds. Overall, North American pension funds should help to provide some stability in volatile capital markets and a potentially softening economy in 2023. These long-term investors will help boost the world economy while it faces higher inflation, geopolitical uncertainty, a need for clean energy, and other types of updated infrastructure.
Higher interest rates lower the present value of liabilities for pension funds and have helped increase fund solvency despite overall volatility in the investment markets. Canadian pension funds remain the most solvent in North America, with only five percent having solvency ratios (assets to projected liabilities) less than 80% at year-end 2022.i U.S. public pension funds are also generally in a strong financial position while many Taft-Hartley/multi-employer funds face some financial challenges. The U.S. federal government’s 2021 American Rescue Plan will address 200 distressed multi-employer pension plans in 2023 and beyond to help ensure that 2 to 3 million workers’ pension plans remain solvent and pay benefits through at least 2051.ii
The Actuarial Standards Board in the U.S. will require all pension fund liability valuations, effective February 15, 2023, to comply with Actuarial Standard of Practice (ASOP) No. 4 “Measuring Pension Obligations and Determining Pension Costs or Contributions.iii This will require pension funds to add a lower discount rate scenario for liability valuation for better risk management. Industry organizations like the National Conference on Public Employee Retirement Systems and the National Public Pension Coalition will evaluate the impact and provide guidance on adoption of this new valuation standard.
U.S. public pension funds are mostly state and local entities funded by state and local governments. Many may face some financial challenges, with potential income tax cuts and a possible softening economy also pressuring the ability to fund state/local plans. States like Alaska and Oklahoma have struggled over the past couple of years to implement defined contributions instead of defined-benefit pension plans to reduce costs for new employees. These financial concerns have exacerbated staff shortages and increased operational costs due to a lesser ability to recruit and retain qualified teachers, public safety workers, and other employees who want the retirement security of defined-benefit pensions. With the 2022 elections, redistricting and retirements resulted in 32 of the top legislative positions across the 50 states having new leaders. These new leaders will often determine committee assignments, priorities, and influence the funding approach for public pension funds. They will need to be fully educated of these concerns in the coming year to ensure a balanced perspective on the long-term costs and benefits of supporting public, defined-benefit pension funds.
Pension funds of all kinds will continue to modernize their operations in 2023 to meet the expectations of members who receive higher levels of service from banks or other types of financial services providers. They recognize the technical limitations of their current pension administration systems that require staff members to conduct core business functions through various manual processes and create obstacles to achieving effectiveness and efficiency objectives. Pension funds want modern administration platforms and digital engagement approaches to communicate and collaborate with their members more efficiently and securely. Retirement rules have also become more complicated over time. This knowledge is currently held by key staff members, but pension funds want rules knowledge to be inherent in a modern administration platform to improve efficiency and processing consistency while mitigating the negative impact of retiring staff.
For 2023, North American pension funds will continue to evolve their risk and investment management capabilities and manage their assets and liabilities in a way that helps to ensure retirement security for their members. There will likely be some challenges in various states that question the long-term costs and advantages of defined-benefit pension plans, where effective education for legislators and the public will be necessary to achieve the best outcomes for pension funds. On the road ahead, we’ll see a continuation of core system and process modernization, along with member experience enhancements.
i Mercer. “DB Pension Plans Begin 2023 in Better Financial Health Than They Began 2022”. https://www.mercer.ca/en/newsroom/mercer-pension-health-pulse-q4-2022.html, January 2023.
ii White House Fact Sheet. “President Biden Announces Historic Relief to Protect Hard-Earned Pensions of Hundreds of Thousands of Union Workers and Retirees”, https://www.whitehouse.gov/briefing-room/statements-releases/2022/12/08/fact-sheet-president-biden-announces-historic-relief-to-protect-hard-earned-pensions-of-hundreds-of-thousands-of-union-workers-and-retirees/#:~:text=Today’s%20Announcement%20Protects%20the%20Earned,distressed%20multiemployer%20pension%20plan%20in, December 2022.
iii Actuarial Standards Board. “Measuring Pension Obligations and Determining Pension Plan Costs or Contributions”, http://www.actuarialstandardsboard.org/asops/asop-no-4-measuring-pension-obligations-and-determining-pension-plan-costs-or-contributions/, December 2021.
