Lump-sum payments from Lockheed Martin’s defined benefit pension plan to certain former employees significantly reduced its pension benefit obligations—though not enough to offset a mortality-related increase.
Lockheed said in a recent filing with the Securities and Exchange
Commission (SEC) that it made lump-sum payments of $427 million last year to certain pension plan participants who had not started receiving their vested benefit payments. The
action reduced the corresponding benefit obligation by $529 million, according
to the Lockheed filing.
In the SEC filing, the company noted that the measurement of
benefit obligations is affected by key assumptions such as discount rates,
employee turnover and participant longevity, among other factors. Its benefit
obligations at December 31, 2014, reflect new longevity assumptions, which had
the effect of increasing the defined benefit pension benefit obligations by $3.4 billion
despite the sizable lump-sum payout.
Lockheed Martin utilized a discount rate of 4.00% when
calculating its benefit obligations. It noted that an increase of 25 basis
points (bps) in the discount rate assumption, with all other assumptions held
constant, would have decreased its DB benefit obligation by approximately $1.5
billion, while a decrease of 25 basis points would have increased the
obligation by the same amount.
Some retirement specialist advisers and plan service
providers see a big opportunity in supporting pension plan sponsors, like
Lockheed, as they evaluate means to reduce costs and risks associated with running
an ongoing pension plan (see “Pension
Risk Insights Can Be Significant Value Add”).
A 2014 report from
Aon Hewitt found 62% of pension plan sponsors are somewhat or very likely
to adjust their plan’s investments in 2015 to better match the liabilities in
the year ahead—a task advisers are well-suited to support. The same report
found lump-sum window settlements are becoming
increasingly popular. Twelve percent of plan sponsors had recently introduced or
expanded the availability of lump-sum windows for retirees or terminated vested
participants, according to Aon Hewitt, and 43% said they were somewhat or very likely to complete a lump-sum window
for inactive participants in the next year.
First, says Jan Holman, director of
adviser education at Thornburg Investment Management, plan advisers should
advise their plan sponsor clients that no retirement discussion is complete
without pulling in longevity.
“Retirement, retirement, retirement,”
Holman says. “We’ve focused on that nonstop, but now it’s more like graduating
from high school or college. Retirement is an event, but it’s not the whole
thing.”
The industry needs to look at retirement
more holistically, Holman tells PLANADVISER. As people live longer—and some
will even live into their 90s and older—their approach to life as well as to
portfolio allocations will likely change. “These are the things they need to
help their employees become aware of,” she says. “It’s a different way of life,
and a different way of looking at things. Your life isn’t going to end at age
67.”
These longer lifespans will mean factoring
health considerations, which may change the amount people put away for retirement
to meet health care costs. Some people may want to consider long-term care
policies, since a critical health event could wipe out the majority of
retirement funding.
Portfolio structure is a key part,
Holman says, and withdrawal strategies are crucial. “Accumulation is easy,
compared with withdrawal strategies,” she says. A portfolio needed to last for
a long life must have sufficient liquidity to produce dollars for distribution.
High-quality investments are needed to produce income and have an opportunity
to increase that income over time. “Bond investments provide stability, but you
get what you get,” Holman observes.
Perhaps even better than bonds are high-quality, dividend-paying stocks. Global dividend portfolios may also be desirable for their
ability to pay higher dividends over time. Holman points out that foreign companies
are more inclined to pay higher dividends than those in the U.S., because the
focus here is share price and appreciation, rather than what is being
distributed to shareholders. For this reason, the portfolio should include some
global dividend-yielding investments.
Helping participants carve out a spending policy
is a good discussion to have, Holman feels. People have two choices, one that
is a lifestyle spending policy in which the investor withdraws a set sum of
money each year, increasing every year by the rate of inflation. This is not as
good as an endowment spending policy, she observes, adding, “You want the money
to last as long as possible.”
Spending
Rates
The first step is to decide on a
spending rate, for example, 5% of a $1 million portfolio. Every year, the
investor bases an annual spending amount on 90% of the previous year’s amount,
with a small percentage of the current value of the portfolio added on. The
benefit of this approach is that the investor is managing withdrawal amounts in
a disciplined way. “You don’t just take 5% of the whole portfolio,” Holman
explains. “It reflects to some extent the value of the underlying portfolio,
and injects discipline for what you have to do when the portfolio is down.”
On the softer side, Holman suggests
bringing in speakers to address participants on the actual life that they can
live in retirement. Richard Leider, author of books about living with purpose,
and AARP’s Life Reimagined website are two possibilities, Holman says.
“If you’re going to incorporate a
discussion of longevity into what you’re talking to plan participants about, it
has to be holistic,” Holman says. Some of the factors may be positive and tangible,
such as the impact and effect an individual can have on others, with a library
of information to draw on, to give back to society more broadly. Or people
might be one of multiple generations of a family alive at the same time—giving a chance to serve and support younger generations.
The retirement business is easier
when it just requires the services of an actuary, Holman says, but then the
retirement investor’s soul is left out of the equation. “You can’t quantify
quality of life and things like purpose,” she says. The financial services
industry has concentrated on the nuts and bolts of investing. Such things as the value of
starting early, compounding and time horizons have dominated the discussion, but longevity represents the more human aspects of retirement. “It’s not just a financial
equation,” she says. “It’s also about helping people think consciously about
what these dollars can mean in terms of their futures.”
Holman advises avoiding a single
focus on numbers only, with a view toward raising participation rates. “If
folks talked to their plan sponsor clients about bringing these other things
into the discussion, I wouldn’t be surprised if plan participation rates
increased, if done in a strategic and thoughtful manner,” she says. As people
learn in different ways, by reading or watching videos, plan sponsors should
use whatever communication tools will best reach participants to help them see
the importance of thinking about the whole longevity puzzle.
The growing awareness of increased
lifespans is pushing people to look beyond the money and ask how they’d like to live that part of their life. “I think the longevity discussion brings
these choices into the equation,” Holman says. The numbers say we are likely to
live longer—it’s just a reality.”