Considering Risk Transfer Top of Mind for DB Plan Sponsors

Many pension plan sponsors could use help overcoming misconceptions about transferring liabilities to an insurer.

In growing numbers, North American retirement plan sponsors are seeking to reduce or remove the innate risks in their defined benefit (DB) pension plans.

Challenged by enduring marketplace volatility, escalating longevity and mounting Pension Benefit Guaranty Corporation (PBGC) premiums, plan sponsors are recognizing the significant risks caused by their pensions—and the detrimental effects these plans can have on shareholder value.

The survey demonstrates that pension risk management remains top of mind for many plan sponsors, and that a significant percentage of them are actively researching their de-risking options. More than 48% of survey respondents indicated they are either considering transferring, or are very likely to transfer, pension risk this year. This grows to 71% of plan sponsors with more than $250 million assets under management (AUM).

Moreover, one-third of pension plan professionals either partially or fully disagree with the notion that companies gain an advantage by delaying the implementation of risk-management solutions to further benefit from financial market improvements. Forty-two percent of these same professionals either partially or fully disagree with the idea that risk transfer solutions can only be executed once a plan reaches or exceeds full-funded status. These responses foretell a considerable likelihood of plan sponsors taking near-term action to mitigate pension risk.

Increasing awareness of longevity risk and its effect on pension liabilities is another essential trend identified within the survey. Nearly 45% of all respondents have a high or very high level of understanding about the impact increasing longevity is having on their pension obligations. When analyzed by plan size, 57% of plan sponsors with more than $250 million in AUM indicated they have a high or very high level of longevity risk awareness, while 34% of plan sponsors with $250 million or less AUM felt they have a high or very high awareness of such risk.

NEXT: Misconceptions about de-risking

As the survey illustrates, the misconception of pension risk transfer being too cost-prohibitive continues to exist in the marketplace, with more than two-thirds of all survey respondents either fully or partially agreeing with this fallacy. And when responding to the flawed assertion that “reducing defined benefit risk reduces shareholder value,” plan sponsors reacted counter-intuitively, with 21% fully agreeing and 40% partially agreeing. These findings highlight the need to educate the market regarding the cost of pension buyouts as compared to the “economic” cost of retaining pension risk, and the shareholder value that can potentially be created by reducing pension risk.                      

A survey finding of particular interest is that 20% of plan sponsors with more than $250 million AUM said the recent PBGC premium increases in the U.S. have prompted them to fund their pension plans and transfer some or all of the risk to a third-party insurer. Conversely, 45% of plan sponsors with less than $250 million AUM said they would “do nothing.”

Among plan sponsors with more than $250 AUM, 70% are considering, or are very like to consider, using or increasing their use of liability-driven investing (LDI) strategies. Meanwhile, 54% of plan sponsors with less than $250 million AUM are not at all likely to utilize or increase the usage of LDI strategies.

Pension Plan De-Risking, North America 2016, commissioned by Clear Path Analysis and sponsored by Prudential Retirement, examines the views of 123 senior finance, pension, treasury and human resources professionals to better comprehend their outlook on pension de-risking in the current economic landscape. A copy of the report may be obtained for free on Clear Path Analysis’ website.