Understanding extended funding relief

The S&P 500 fell 20.6% during the first half of 2022, but funding status for many plans is at the highest levels since 2014. This provides some plan sponsors additional options to protect funded status going forward.

Funded status varies

LDI has historically provided a considerable hedge for balance sheet accounting and liability measures for cash contribution purposes. Since the American Rescue Plan Act (ARPA) passed in 2021, things have changed. Now the discount rate used for calculating the FTAP liability is significantly different from the spot rate used to determine the PBO liability.

As a result, a plan’s funded status, impacted by investment returns and changing discount rates, will respond considerably differently against these two measures. This will remain so through 2030.

A second look at the glidepath

Plans with LDI glidepaths in place may need to re-evaluate their LDI implementation and their glidepath triggers. How much LDI is appropriate to both limit accounting (PBO) volatility and funding (FTAP) volatility while supporting as high a return expectation as needed to fund plan liabilities?

The answer will likely depend on appropriately prioritizing the goals and objectives that are most critical for the plan sponsor. Learn more about using LDI to your advantage and the important priorities to consider for a successful implementation. 

Information provided by SEI Investments Management Corporation, a registered investment adviser and wholly owned subsidiary of SEI Investments Company (SEI). Neither SEI nor its subsidiaries is affiliated with any firms mentioned herein. There are risks involved with investing including loss of principal. No investment strategy, including diversification, can protect against market risk or loss.