2022 Investment Returns and Your Defined Benefit LOSAP
Most Penflex clients are already aware that 2022 was not a good year for asset returns. Both equity and fixed income posted double-digit negative returns for the year:
- Global equities returned -19%
- Core fixed income (usually an anchor when equities suffer) returned -12%
In fact, since The Great Recession in 2008, this last year (2022) was:
- the worst year for equity returns; AND
- the worst year for fixed income returns; and
- the ONLY year where both fixed income and equity returns were negative.
What does this mean for your annual LOSAP funding contribution? As you may be expecting, your LOSAP contribution may go up over the next few years.
But our clients should keep in mind that Penflex uses several techniques to help plan sponsors lessen and prepare for potential cost volatility:
- We use asset smoothing (averaging) in our actuarial valuations
- The higher-than-expected returns from 2020 and 2021 will partially offset the poor returns from 2022
- The losses from 2022 will be spread over three years to partially lessen year-over-year contribution increases
- We use amortization payments to further lessen contribution volatility
- Any variances in either the LOSAP actuarial liabilities or the LOSAP asset values are amortized over future years (typically ranging from 10 to 15 years, depending on plan demographics)
- We use lagged valuations
- The actuarial valuation for 2023 (the first valuation reflecting these poor asset returns from 2022) is used to determine the contribution to be made in 2024 (over one year from now)
- This allows plan sponsors time to increase budgets for potential cost increases
- We annually provide sensitivity analysis for plan sponsors for several possible events including a -10% asset return in a single year.
- Refer to the Sensitivity Analysis (Exhibit IX in most 2022 actuarial valuation reports) for an estimate already customized for your plan
While your LOSAP contribution for 2024 will likely increase from the 2023 contribution, the techniques outlined above will work together so that the increase may not be as large as you fear.
Please contact Kati Young or Eric Veletzos at Penflex for more information should you have any questions at (518)783-6933.