The Next Great DB Risk: Complacency

What a difference a year makes—strong investment performance and a modest rise in interest rates during 2013 caused a steep increase in the funded status of the typical defined benefit (DB) plan, reversing a multi-year downward trend.

By Mike Dulaney, senior consulting actuary at the Principal Financial Group | February 14, 2014
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The improvements moved most frozen plans closer to being ready for termination and gave active plans a welcome reprieve from the pains of the last several years.  

But the drastic improvements could lull plan sponsors into a false sense of security that could result in complacency at a time when they should be evaluating what actions to take.  DB plan risks didn’t go away just because plans are on the good side of risk now.  Even if a plan is 100% funded, it still may not have the appropriate risk controls in place.

Whether the DB is active or frozen, now is a critical and opportune time to help plan sponsors evaluate the status of their plans and proactively develop strategies to manage the ongoing risks of a DB plan.

What goes up can come down

The increased funded status can easily be threatened if equity performance slides or interest rates decrease.  Additionally, currently scheduled increases in Pension Benefit Guaranty Corporation (PBGC) premiums—double to triple the level from a few years ago—will make it more costly to operate a plan. The premium will be even higher for underfunded plans.  And there is the potential for significant premium increases down the road.     

It was difficult in a low interest rate environment, and especially if a plan was underfunded, to realistically consider some de-risking options, but improved conditions make de-risking a much more viable option.