1Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.
PS: Can you talk a little bit about how that actually works?
Proctor: The plan sponsor’s pension liability for generally accepted accounting principles, or GAAP accounting purposes, is equal to the present value of the projected benefit payments that the plan sponsor has promised to its participants. This present value is determined using a discount rate based on the current interest yield curve for high quality corporate bonds such as the Citigroup Pension Discount Curve. The Insured LDI solution provides a contract value that is calculated using the same projected benefit payments provided by the plan sponsor and the same yield curve. Thus, the Insured LDI contract value will change in sync with the plan liability as interest rates change. If interest rates go down, the pension liability goes up and the Insured LDI contract value would go up by the same percentage—and vice versa. Thus, the plan’s funded status ratio would stay the same.
Insured LDI also pays the scheduled benefit payments in a bulk payment to the plan every month, which provides the monthly liquidity that the plan needs to make those benefit payments.
PS: What has the Insured LDI solution's track record been?
Proctor: Our first Insured LDI client funded $50 million in December 2011 and elected to use the Pension Protection Act (PPA) full yield curve to determine the Insured LDI contract value. We now have more than a three-year track record of performance, and the plan sponsor has received a statement every month documenting that the Insured LDI contract value moved exactly with its pension liability.
Interest rates and investments in the market have been very volatile over the past three years, but this plan’s funded ratio has remained the same every month. This has allowed the company’s executives to really focus on running their organization, rather than worrying what the daily changes in the market would do to the pension plan.
In fact, the total annualized gross return for Insured LDI for this client was 7.94% per year during the period from December 31, 2011, through March 31, 2015. Although that is a good annual return, the real value of Insured LDI is that the plan’s funded status remains stable no matter what happens to interest rates or equity markets. Thus, a plan sponsor can now fund up its plan to avoid PBGC variable-rate premiums, then use Insured LDI to make sure it doesn’t drop back below the desired funding level.
The author of this article is not an employee or affiliated with Pacific Life. Pacific Life is not affiliated with PLANSPONSOR, or PLANADVISER. This article was reprinted with the permission of PLANSPONSOR. Copyright © 2015 by PLANSPONSOR.
Pacific Insured LDI is a group annuity contract.
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