Pension Plan Sponsors Move toward Plan Termination

Aon Consulting found that many companies with frozen pensions intend to make investment strategy changes to cut corporate pension expense volatility and put themselves one step closer to plan termination.

An Aon news release said its poll of more than 70 U.S. organizations, with a cumulative total of frozen pension plan assets of more than $50 billion, found that 81% are planning to change their investment strategy in the near future. Some 35% are looking to hedge significant risks, while 27% plan to change investments to reflect the shorter investment horizon to termination, and 19% plan to move to a more liability-driven investment strategy.

“The majority of plan sponsors want to terminate their frozen plans quickly, but don’t have sufficient assets to do so,” said Cecil Hemingway, U.S. Retirement Practice leader with Aon Consulting, in the release. “Survey participants told us they made the design changes associated with closing their pension plans (soft freeze) or ending future benefit accruals (hard freeze). However, without addressing the investment paradigm, they are leaving themselves open to significant future risk. Those shifting investment strategies are addressing the risks still inherent in their pension plans, while getting their plans as well funded as quickly as possible.”

Beyond modifying the pension plan’s investment strategies, 68% have reviewed the expected future cash needs of their pension plans and found that additional cuts, outside the pension plan, will likely need to be made.

Conversely, the survey revealed that 19% of organizations currently do not have plans to revise their investment strategies as a lead-in to plan termination. Instead, these companies are retaining their current investment structure or moving away from a low-risk, low-volatility structure so they can capture some of the gain they believe will come about in the near future.

A copy of the report is available here.