Eighty percent of defined benefit (DB) plan sponsors have accelerated funding, largely due to increasing Pension Benefit Guarantee Corporation (PBGC) fees and the prospect of lower corporate taxes, according to results of the Mercer/ CFO Research 2017 Risk Survey, “Adventures in Pension Risk Management.”
“Two years ago, mortality assumptions dominated as the main influencing factor. Today, PBGC premiums and market conditions have emerged as most cited reasons. Companies feel that the time is right to reduce or eliminate their pension funding shortfalls.” says Matt McDaniel, partner, Mercer. “Continuing the trend we found in our 2015 survey, the migration toward pension risk transfer and de-risking carries on at an accelerated pace.”
Specifically, respondents say they are now contributing more than the minimum level of funding to their DB plans either because they want to reach specific thresholds or because they aim to fully fund the plan over a shorter period of time than regulations require. PBGC premiums tripled between 2011 and 2016 and are expected to quadruple by 2019—which has had a notable effect on plan sponsors.
When asked about reasons why they either have increased funding or would consider doing so, 40% of respondents decided to increase funding to reduce the cost of future PBGC premiums, and nearly 33% are also considering funding for that same reason. According to Mercer, that combined total of nearly 73% is a notable increase from the 2015 survey results, which found only about 60% citing PBGC premiums as a deciding factor to fund above requirement.
Nearly 60% of survey respondents intend to terminate their plans within the next ten years. Most have a funding deficit they must overcome first. “Sponsors who want to develop a successful pension exit strategy have to make sure they create a process that evaluates and changes the asset allocation, lowering pension risk as frozen plans move closer to termination.” says McDaniel. “DB plan sponsors should weigh considerations such as the plan’s objective, their time horizon, the magnitude of their obligations and the state of the economy.”NEXT: De-Risking Accelerates
More than eight in ten respondents say they either have a “dynamic de-risking strategy in place” (42%) or “are currently considering one” (40%), citing a desire to avoid volatility in their financial statements as a main reason. More than half of respondents (55%), however, say they struggle with finding enough internal resources to manage their pension plan. As such, 52% of those surveyed delegate some or all investment execution to a third party through an outsourced chief investment officer (OCIO) model.
Nearly 75% of Mercer’s survey respondents say they have already offered lump-sum payments to certain participants since 2012—up from 59% from the 2015 Mercer CFO survey findings. About 50% of all respondents consider it likely that their companies will take some form of lump-sum, risk-transfer action in the next couple of years—for many of these sponsors, this will be a second or third lump-sum offer.
A significant number of sponsors have implemented an annuity buyout for some pension participants, where an insurer assumes responsibility for the sponsor’s retirement liabilities. Among survey respondents, more than half (55%) have either completed such an annuity buyout or are considering it.
Many companies are held back by the misconception that such annuities are either “expensive” (37%) or “very expensive” (25%). Specifically, these respondents estimate that the cost of an annuity would require their pensions to post a projected benefit obligation (PBO) of more than 110%. However, Mercer’s experience shows the majority of transactions occur between 100% and 110% of PBO.
The full report can be found here.
The survey collected 175 responses, mostly from CFOs, CEOs and finance directors, with 80% of responses representing DB pension plan assets of between $100 million and $5 billion. More than half (53%) of respondents represent companies with annual revenues of between $500 million and $5 billion. Respondents come from a broad range of industries, with the most sizeable clusters in aerospace/defense and business/professional services.