Small Percentage of DB Plan Obligations Have Been Settled

However, Rick Jones, with Aon, says, “Pension risk transfer is a trillion dollar market, and much more will be settled in coming year."

While headlines have stated the disappearance of defined benefit (DB) retirement plans, a report from Aon shows only 6% of U.S. corporate DB plan obligations have actually been settled since 2012.

“While the number of closed and frozen defined benefit plans continues to increase, plan sponsors still have an obligation to fund these plans, which means they are far from being eliminated altogether,” says Rick Jones, retirement and investment senior partner at Aon. “Pension risk transfer is a trillion dollar market, and much more will be settled in coming years as corporate finance and insurance market environments allow. There is only so much bandwidth in both, but plan sponsor interest and market capacity continue to grow.”

Aon’s study, covering 100 U.S. plan sponsors totaling nearly four million participants and $400 billion in assets, found the majority of plan sponsors are continuing to look at settlement strategies to opportunistically shrink the size of their pension plans. Forty-three percent have implemented a lump-sum offer to former employees, and 39% say they are somewhat or very likely to implement this approach in the next 12 to 24 months. While just 8% have implemented an insured annuity buyout to date, the number of plan sponsors adopting this strategy could at least double within the next 12 to 24 months, Aon says. 

“PBGC premiums are becoming a material drag on pension asset growth for underfunded plans,” says Ari Jacobs, global retirement solutions leader at Aon. “We’re seeing situations where expected PBGC premiums owed on behalf of some participants are even greater than the value of their expected benefits. Targeted annuity buyouts are capturing the interest of plan sponsors because these solutions can transfer higher-cost obligations to an insurer, where those benefits can be provided much more economically.”

Pension Benefit Guaranty Corporation (PBGC) premiums are one reason for a surge in corporate pension contributions. In addition to significantly increased usage of corporate debt, contributions are being financed by a number of other sources, with the predominant sources being operating cash flow (75%) and cash reserves (39%), Aon found.

“There are many reasons that plan sponsors are looking to increase cash contributions, including increased PBGC premiums, the prospects for tax reform, growing impatience with continued pension deficits and the expiration of legislated funding relief,” says Jones.