DB Plans Proceed with De-Risking

More U.S. companies are formalizing plans to de-risk their defined benefit (DB) plans.

A survey from Towers Watson and Institutional Investor Forums indicates DB plans taking such steps are benefiting from rising interest rates and improved equity performance. In addition, employer interest in offering lump-sum buyouts to former employees remains strong, and a majority of plan sponsors with DB plans still open to new hires intend to offer a pension to all employees five years from now.

Three-fourths (75%) of respondents have implemented, are planning to, or are considering developing a formal journey plan to de-risk their DB plan. A journey plan details actions a plan sponsor will take to de-risk its pension plan once certain trigger points have been reached. Forty two percent of respondents had a journey plan in place before this year, while 8% implemented a plan during this year.

“Pension plan sponsors remain under tremendous pressure to reduce the financial liabilities of their DB plans,” said Michael Archer, leader of the client solutions group for retirement, North America at Towers Watson, New York. “Last year was marked by unprecedented pension de-risking settlement activities, primarily lump-sum payments and annuity purchases. Many employers see these settlements as the most viable option to lower their DB burdens and a significant number are planning to take action in the next year or two.”

Although respondents cited several factors that led them to develop a formal de-risking plan, the most often-cited factor was the impact of the DB plan on financial statements (69%), followed by the impact of the DB plan on company cash flow (58%) and the general cost of the plan (41%).

Lump sum payments remain a very attractive de-risking strategy. The survey found 28% of respondents are either planning to offer lump sum payments to former employees next year or are considering doing so in 2015. This is in addition to the 39% of respondents who did so in 2012 or indicated they were doing so this year. The survey results show lump sum offers are especially appealing to companies whose ultimate objective in de-risking their DB plan is to transfer all of their pension obligations.

“We continue to see interest in companies offering lump sum buyouts to vested former employees who have not yet retired. The success of these programs in 2012 will help drive a significant amount of activity over the next several years,” said Matt Herrmann, leader of retirement risk management at Towers Watson. “The low interest rate environment coupled with moderate funded status levels limited the options for many plan sponsors over the past several years. However, if the recent improvements in funded status continue, de-risking activity could be strong for the foreseeable future.”

The survey also shows a high expectation among companies with DB plans still open to new hires that their plans will be open five years from now. Among the 30% of respondents with DB plans open to new hires, more than 70% expect to offer a DB plan five years from now. In addition, 75% of companies with closed plans expect at least some current participants to still be accruing benefits five years from now.

In terms of a DB plan funding policy, nearly half (48%) of respondents have not recently changed the amount they plan to contribute to their plan, while 23% still contribute the minimum required. About two in 10 (21%) have increased their planned contribution.

As for investment management, respondents prefer an investment strategy that focuses on risk reduction rather than higher returns. More than three-fourths (78%) plan to increase their focus on risk in the next two to three years rather than seeking higher returns. Also, interest in alternative investments and long-dated fixed income continues to rise.

The Towers Watson/Institutional Investor Forums survey, U.S. Pension Risk Management – What Comes Next, was conducted in June and July, and includes responses from 180 U.S. companies that sponsor at least one non-bargaining DB program.