More Companies Move to 'De-Risk' Their Pension Plans

Interest in lump-sum payments remains strong

By Stephen Miller, CEBS November 12, 2013

A growing number of U.S. employers are formalizing steps to de-risk their defined benefit (DB) pension plans, as such plans are benefiting from rising interest rates and improved equity performance, according to a new survey by consultancy Towers Watson and Institutional Investor Forums, a provider of networking opportunities for senior financial executives.

Among the survey findings:

  • Employer interest in offering lump-sum buyouts to former workers remains strong.
  • Most plan sponsors with DB pensions open to new hires intend to still offer a pension to all employees five years from now.
  • Three-fourths of respondents have implemented, are planning to, or are considering developing, a "journey plan" to de-risk their defined benefit pensions.

A journey plan details actions that a plan sponsor will take to de-risk its pension plan once certain trigger points are reached. Forty-two percent of respondents had a journey plan in place before this year, while 8 percent implemented one this year.

“Pension plan sponsors remain under tremendous pressure to reduce the financial liabilities of their DB plans,” said Michael Archer, leader of the client solutions group for retirement, North America, at Towers Watson. “Last year was marked by unprecedented pension de-risking settlement activities, primarily lump-sum payments and annuity purchases. Many employers see these settlements as the most viable option to lower their DB burdens, and a significant number are planning to take action in the next year or two.”

Although respondents cited several factors that led them to develop a formal de-risking plan, the most often-cited factor was the impact of the DB pensions on financial statements (69 percent), followed by the effect of pension obligations on company cash flow (58 percent), and the plan’s general cost (41 percent).

Lump-Sum Payments

Providing lump-sum payments that replace future obligations to participants remains an attractive de-risking strategy. The survey found that 28 percent of plan sponsors are either planning to offer lump-sum payments to former employees next year or are considering doing so in 2015. That’s in addition to the 39 percent of respondents who did so in 2012 or indicated they were doing so this year.

Lump-sum offers are especially appealing to companies whose ultimate objective in de-risking their defined benefit plan is to transfer all of their pension obligations.

“We continue to see interest in companies offering lump-sum buyouts to vested former employees who have not yet retired,” said Matt Herrmann, leader of retirement risk management at Towers Watson. “The success of these programs in 2012 will help drive a significant amount of activity over the next several years. The low-interest-rate environment, coupled with moderate funded-status levels, limited the options for many plan sponsors over the past several years. However, if the recent improvements in funded status continue, de-risking activity could be strong for the foreseeable future.”

Keeping Plans Open

There is a high expectation among companies with DB plans that are still open to new hires that their plans will be open five years from now. Among the 30 percent of respondents with DB plans that new hires can enroll in, more than 70 percent expect to offer this type of plan five years from now. In addition, 75 percent of companies with closed plans expect at least some current participants to still accrue benefits five years from now.

Among other survey findings:

  • DB plan funding policy. Nearly half of respondents (48 percent) have not recently changed the amount they intend to contribute to their plan, while 23 percent still contribute the minimum required. About two in ten (21 percent) have increased their planned contribution.
  • Investment management. Respondents prefer an investment strategy that focuses on risk reduction, rather than higher returns. More than three-fourths (78 percent) will increase their focus on risk in the next two to three years, instead of seeking higher returns. Interest in alternative investments and long-dated fixed income continues to rise.

The Towers Watson/Institutional Investor Forums survey U.S. Pension Risk Management—What Comes Next, which was conducted in June and July of 2013, includes responses from 180 U.S. companies that sponsor at least one nonbargaining defined benefit program.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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