In 2012,
Ford and General Motors blazed a new path for companies seeking to reduce
pension obligations and balance sheet volatility. Both companies reportedly offered
lump-sums to tens of thousands of vested retirees and former employees, as
well as implementing other de-risking strategies. While these actions sparked
interest among defined benefit plan sponsors, many sponsors were prevented from
acting by persistently low interest rates and other factors which negatively
affected plan liabilities and limited the benefits of stock market gains.
While
waiting for more favorable circumstances to develop, many plan sponsors
assembled plans and strategies to mitigate and manage the risks associated with
their plans. Today, rising interest rates and strong stock market performance
have improved funding ratios and created an environment in which plan sponsors
can — and are — acting decisively.
DB pension
plan de-risking is not a new idea. A growing number of U.S. employers have
formalized their de-risking strategies by developing “journey plans.” These
blueprints for removing risk simplify the implementation process by including
pre-approved actions that may be taken when clearly defined triggers are
reached. Journey plans are important
because they eliminate the need to repeat the decision-making processes over
and over again.
Today,
improved funding status has given plans the flexibility to pursue de-risking
activities, and created circumstances in which less cash may be required to
pursue settlement activities. Throughout 2013, plan funding levels showed
steady improvement. An 87 basis point increase in the discount rate and an
11.2% investment gain pushed the average funding ratio of plans in the Milliman 100 Pension Funding Index from
81.3% in January 2013 to 95.2% in December 2013. It was the best year for
pension plans in the 13-year history of the Index.
Despite a
stock market setback in January 2014, an Aon
Hewitt report found that “employers continue to aggressively monitor and
mitigate risks in their defined benefit plans. Generally speaking, their
actions fall into four categories: understanding the risks, monitoring the
results, decreasing the liabilities and syncing the assets’ movement to match
liability changes.”
According to
the report, many DB plan sponsors are reducing their liabilities, or plan to,
by making lump-sums available to terminated vested participants and/or
retirees. According to the survey:
12% of
sponsors have recently completed a window offering lump-sums.
43% of those
who have not offered lump-sum options are very or somewhat likely to offer a
window in 2014.
13% of
employers have expanded lump-sum options and now permanently offer them to
participants.
Many DB plan
sponsors also have adjusted their investments to better match the plan
liabilities or expect to do so soon.
It is time
for plan sponsors to take action to reach their risk management goals.
Successfully implementing a de-risking strategy requires careful planning and
thoughtful execution. Plan sponsors should be certain they understand and can
address the challenges that often accompany the implementation of a de-risking
solution such as ensuring they have accurate plan participant data or knowing
the best ways to deal with missing or nonresponsive former employees.
Source: Employee
Benefit News
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