ABC Testifies on Pension De-Risking

The American Benefits Council (ABC) testified before the ERISA Advisory Committee (ERIC) to describe the motivations behind employers reducing their pension plan liabilities by “de-risking.”

Craig Rosenthal, a partner with consulting firm Mercer, testified last week on ABC’s behalf. He emphasized that the legislative and regulatory environment for pension plans has made sponsorship increasingly difficult over the past few decades.

Rosenthal pointed out that since the Pension Protection Act (PPA) became law in 2006, pension plans have been required, effective 2008, to fund any funding shortfalls over a seven-year period. Additionally, changes have been made to Pension Benefit Guaranty Corporation (PBGC) premium calculations that have resulted in pension plan sponsors generally paying higher premiums to the agency.

“If funding and accounting obligations can be stabilized and the spiraling up of Pension Benefit Guaranty Corporation premium obligations can be reversed, there would be far less reason for companies to de-risk,” Rosenthal told the EAC panel.

Rosenthal explained that plan sponsors are considering the following factors when deciding whether to de-risk:

  • The size of the pension plan liabilities relative to the overall size of the plan, which affects the impact that funding and balance sheet volatility can have on the company;
  • The plan sponsor’s views on the economic outlook and the plan’s ability to withstand risk;
  • The administrative costs associated with maintaining the plan, including PBGC premiums, and the plan sponsor’s views on future premiums;
  • The plan sponsor’s ability to raise capital, if necessary, to de-risk the plan;
  • The existence of collective bargaining agreements; and
  • The plan sponsor’s ability to obtain accurate historical plan participant information.

“There is no one-size-fits-all answer as to why some companies adopt de-risking approaches and others do not, nor is there a simple answer as to why companies that do die-risk do so in different ways,” Rosenthal said.

Rosenthal discussed the two main approaches to de-risking—retaining liability thought liability driven investing (LDI) or transferring liability to a third party—as well as the related topics of full vs. partial de-risking, no cutbacks in participant rights, and participant decisions about lump sums. ABC’s ultimate recommendation to the EAC panel was to consider preserving defined benefit pension plans by mitigating the complex financial challenges imposed on pension plan sponsors.

The American Benefits Council is a national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. Its members represent the spectrum of the private employee benefits community and either directly sponsor or administer retirement and health plans covering more than 100 million Americans.

Rosenthal’s full testimony can be downloaded from the ABC website.