Fed Cuts Rates – Retirees Get Shafted

Once again, this aggressive Fed Funds rate cut is hosing those trying to live off a modest savings account. For years our seniors have been forced to take on more and more risk, both in bonds and equities, to try and stretch their savings, as interest income alone won’t support their basic living needs and principal balances are constantly a source of additional spending.

Today’s move by the Federal Reserve may or may not help support U.S. equity markets (it is certainly questionable as I write this note) following last week’s trouncing, but it may also cause market participants to fear that the Coronavirus’s reach may create greater global economic weakness and push those economies into recession. The action within U.S. bond markets is unprecedented, and signals to me that recessionary fears are top of mind.

Let’s also not discount the impact that the recent market action has had on defined benefit pension plans (DB), as funded ratios are getting crushed given the combination of falling equity markets and dramatically plummeting interest rates. Corporate plans are more immediately impacted, as the liability discount rate is a more realistic interest rate (blended AA Corporate), while public and multiemployer plans pretend that rate changes don’t impact their funded status, as they use the return on asset assumption to value their plan’s liabilities. Oh, it must be nice to be an Ostrich!

Given the market action, it is likely that funded ratios have fallen by much more than 10%, further jeopardizing the sustainability of both public and multiemployer plans, especially those currently designated as Critical and Declining. If pension systems had just taken some risk off the table following more than a decade of good markets and improved funding, we wouldn’t be nearly as concerned, but once again we are left wondering why it is that we never seem to learn as an industry.

Furthermore, there were roughly 125 multiemployer pension systems that were designated as in Critical and Declining status prior to the last month. One doesn’t need to be a rocket scientist to appreciate the fact that a significant percentage of those designated as Critical have achieved a new status. Unlike the Jeffersons, they are not moving on up!

We need policies that will protect seniors, plan participants, and the pension plans that they rely on. We witnessed the devastation that was wrought in 2008 on participants and retirees in defined contribution plans and IRAs. Do we really want history to repeat itself or are we finally going to learn from our mistakes?

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