Since the outbreak of the COVID-19 virus, global equity markets have seen significant declines with the S&P 500 down over 30% from all-time highs in February. In addition, the bond market has seen muted gain. This market is typically non-correlated with stocks and, when used effectively, can diversify an investment portfolio. Experts are projecting that there may be very limited potential for bond market strength given the historically low-interest rates and the anticipation of increased inflation. Due to these weaknesses in investments, there is likely to be a significant increase in the Net Pension Liabilities and Net Other Post-Employment Benefit (OPEB) Liabilities recorded by governments.
Check out this list of recommendations for governments to help prepare you to ask the right questions of expert advisors and anticipate what to expect in the coming months.
- If you operate a single employer plan, it is very important to talk to your actuaries and find out how they have adjusted their estimated liabilities to adjust for the impact of the COVID-19 virus. If you participate in a multiple-employer plan, then actively monitor the information that is put out by the plan administrators to determine how they have responded. It is important to note that the timing of the change in Net Pension Liabilities and Net OPEB Liabilities will be impacted by the plan’s valuation date and, therefore, may not appear in the next valuation report.
- Increase the level of scrutiny applied to the evaluation of the actuarial estimates and look to make sure the revisions are consistent with what the adjustments the actuary said they would do. Be aware that actuaries make long-term projections that smooth out the short-term price volatility, which we are currently seeing, so the recent short-term declines would not be expected to continue at this level for the long-term.
- Anticipate and be prepared for increased contribution requirements. Due to the current-year performance falling behind the actuary’s previous estimate, the short-fall may need to be made-up in the form of additional contributions. This is a conversation to have with your actuary or plan administrator, and we recommend preparedness in this scenario.
- Consider the short-term cash flow implications due to the anticipated fall in dividends in the current-year and most likely the following year. The Pension or OPEB plan will need to continue to make payments to retirees and, therefore, must maintain sufficient cash available to do so. If the cash flow forecasts rely heavily on interest and dividend receipts to make retirees disbursements, then these forecasts need to be revised. Additional cash inflows may need to be provided in the short-term to cover the retiree disbursement obligations. Be aware that not all investment categories have fallen by the same amount, so speak to your investment managers to get a detailed understanding of the exposure to, and performance of, the various categories of investments.
- Poor performance can encourage people to take additional risks to try and recoup some losses. It is encouraged that governments stick to the established investment policy and try to not reach for yield by allowing investment managers to enter into risky investments that the government would not typically authorize. Remember that Pension and OPEB assets are in place for long-term appreciation and satisfaction of liabilities, and short-term periods of volatility are expected over a long time horizon.
- In the financial statements, update note disclosures to provide explanations of the valuation reduction if there has been a material decline in investment values subsequent to the fiscal year-end but before the financial statements are issued.
The performance of the investments is typically outside of the government’s control. However, managing the outcomes and ensuring Pension and OPEB plans to maintain funding and continue to make payments does fall to the government. We highly recommend governments thoroughly evaluate the recent investment value activity and plan accordingly.
If you have any questions about managing your investments, be sure to contact a CRI government professional. For a more in-depth consultation, reach out to an advisor at Level Four Advisory Services, one of our many portfolios within our family of companies who can provide more extensive support and investment guidance.