Defined Benefit Plans continue de-risking, but not disappearing

The relatively few employers who still offer to defined benefit retirement plans will continue to seek ways to de-risk, according to a new report from Institutional Investor Forums and Towers Watson, but most of those who still offer pensions to new hires intend to do so for all employees five years from now.

Survey results released Tuesday by Towers Watson indicate that three-fourths of those with a DB plan either have implemented or are considering implementing a formal “journey” plan to de-risk once certain trigger points have been reached. Forty-two percent of respondents had a journey plan in place by the end of 2012, and another 8% have begun one in 2013.

Lump sums remain a popular de-risking method with 39% offering them or planning on offering them to former employees within the year; another 28% could offer lump-sum payments to pension holders by 2015.

“Pension plan sponsors remain under tremendous pressure to reduce the financial liabilities of their DB plans,” says 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.”

However, out of the 30% of respondents (all of whom sponsor at least one DB plan) who open their pensions to new hires, more than 70% expect still to offer a DB plan in five years. And 75% of companies with closed plans expect at least some of current participants to still be accruing benefits five years from now.

Twenty-three percent of those surveyed contribute the minimum amount required to their plan, and 48% have not recently changed their contributions. Some 21% have upped their DB contributions recently.

More than three-fourths plan to increase their focus on risk reduction rather than higher returns in the next two or three years, says Towers Watson, which notes that interest in alternative investments and long-dated fixed income continues to rise.

“We continue to see interest in companies offering lump-sum buyouts to vested former employees who have not yet retired. The success of these programs in 2012 will help drive a significant amount of activity over the next several years,” says Matt Herrmann, leader of retirement risk management at Towers Watson. “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.”

Source: Employee Benefit News