Philip Bennett, Professor in Practice, co-ordinated a workshop on ‘Current Issues in DB Funding’ at the International Pension and Employee Benefits Lawyers’ Association (IPEBLA) conference in Milan in May 2024.
Together with fellow expert speakers from Belgium, Jurgen de Vresse, France, Auriane Damez, and USA, Dominic DeMatties, the workshop covered issues including:
Jurgen discussed the DB nature of Belgian “DC” pension plans with a minimum return guarantee and the extent to which the employer could use a LDI strategy with an insurance company to manage that minimum return guarantee risk. He also spoke on issues arising from litigation by employers who had insured their employees’ pension rights with an insurance company which subsequently became insolvent. Did the employer have to pay twice to cover those pension rights? In addition, Jurgen covered the rules for using surpluses in Belgian pension plans which had arisen from the rapid increase in interest rates since January 2022.
The speakers went on to explore the impact of insurance company insolvency against the backdrop of DB pension plan buy-in and buy-out activity (including US Department of Labor (DoL) 1995 ERISA guidance currently under review in a DoL consultation on plan fiduciaries selecting insurance companies ) and the extent to which the price of the buy-out was weighted against insurer’s financial strength and the example of the UK Prudential/Rothsay business transfer case.
Auriane outlined how the largely pay as you go French Pillar 2 pensions system worked using the example of AGIRC/ARRCO to which private sector employees (more than 25 million of them) and their employers are both required to contribute. For employer accounting purposes AGIRC/ARRCO is a DC plan. It is also outside the IORP II Directive as a pay as you go scheme. However, it provides what look like DB pensions for life on retirement except that the pension is adjustable. Auriane explained that AGIRC/ARRCO has safety valves to deal with changes in economic and demographic circumstances. These include allowing employer and employer contributions to be increased and pension amounts to be adjusted in the pre-retirement period and the in payment period.
Dominic covered the impact of the recent very rapid increases, since January 2022, in interest rates (ranging from a doubling in the US, a trebling in the UK and a 5 and 8 times increase respectively in Belgium and France). He discussed how those increases feed into the way discount rates are calculated for private sector DB plans for employer accounting and plan funding purposes.
The speakers discussed the contrasting rules for fixing the discount rates for these plans: no discretion in the US (fixed by Congress with a federal budget incentive to keep those rates high), a prudent approach derived from high quality bond yields or expected return on plan investments – with a maximum rate of 6% in Belgium and a Solvency I approach in France for its IORPs. In the UK the position was comparable to Belgium (but no maximum rate) and with the UK Pensions Regulator having encouraged the use of LLDI.
From a UK perspective, Philip ran over the way LDI and LLDI investment strategies had been adopted by some UK DB pension plans, as a response to the quantitative easing (QE) lawful interest rate rigging by central banks, and the September 2022 crisis in the UK gilts market that flowed from the combination of a rapid increase in interest rates and LLDI. Dominic discussed a US DoL Advisory Opinion on the use of LDI by US private sector DB plans and whether a LDI strategy was in conflict with the ERISA Section 404 duty of loyalty. Philip explained that in the UK LLDI using economic borrowing via repos appeared to be contrary to the borrowing restriction in IORP Article 19(3) – a view also held by EIOPA (see footnote 66) . Dominic explained that LLDI was not used in the US for, amongst other reasons, rules related to the taxation of unrelated business income.
Dominic concluded the workshop with a discussion of whether, in the US, DB plan surpluses would lead to plan reopenings to provide future service benefits funded from those surpluses.
