Modest equity market gains last month weren’t enough to
offset the growth in pension liabilities among defined benefit plan sponsors in
the S&P 1500.
Funding levels for pension plans sponsored by S&P 1500
companies fell 1% in April to 84%, according to Mercer. Equity markets,
meanwhile, gained 0.6% during April, based on the S&P 500 index.
Today, as bond yields continue to drop and equity markets
underperform, plan sponsors need to get creative with their pension de-risking
strategies. Jim Ritchie, a principal in Mercer’s retirement business, tells EBN
that corporate retirement administrators can decrease liabilities by hedging
more of their assets into long-term bonds, but warns that sharp movement in
rates can be costly. He also says that lump sum payouts, as well as a setting
up annuities to offload responsibility, are other avenues to consider.
“Many employers are offering lump sums to their former
employees to cash out of the plan, which just reduces the size of the base,”
Ritchie says. “The best one right now is the lump sum payments. Most plans that
have a counter-year plan year [and] are paying their lump sums based on where
interest rates were in sort of the last three months of last year. And right
now, if they had to report something on their books, those interest rates are
lower, which means the lump sums will be higher.”
Annuities, a tactic used by plan sponsors to limit Pension
Benefit Guaranty Corporation premiums and administration fees, can return a
“neutral” result, Ritchie says.
“If you buy
annuities, the amount that you save in these other fees are not really valued
in your liabilities [and] could be the same as what you’re paying the insurance
companies to take over for you,” Ritchie says.
Source: Employee
Benefit News
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