Sponsors Active on Pension Risk and DC Cost Cutting

An Aon Hewitt survey of pension plan sponsors finds almost two in three could take direction action to curb risks and costs in 2015.

The new survey shows there are many reasons pension plan sponsors look to address risk in their pension plan offerings, but reducing Pension Benefit Guaranty Corporation (PBGC) premiums stands out as a common target.

Nearly one in five pension plan sponsors (19%) polled by Aon Hewitt plans to increase cash contributions in 2015 to reduce future PBGC premiums assessed against unfunded liabilities. The survey of 183 defined benefit (DB) plan sponsors found that as pension plan sponsors continue to look for ways to reduce risk, almost two-thirds plan to take some risk-mitigating action in 2015, with settlement strategies topping the list.

Of the sponsors in the sample reporting the presence of a DB plan, more than a third (35%) have an open, ongoing pension plan. Another third (34%) have a plan that is closed to new hires, and nearly the same number (31%) has a frozen plan.

Unified in their plans to take action on pensions risks and costs, sponsors report a variety of approaches:

  • 22% of employers are very likely to offer terminated vested participants a lump sum window in 2015;
  • 19% of employers plan to increase cash contributions to reduce future PBGC premiums;
  • 21% of employers are considering purchasing annuities for a portion of their plan participants; and
  • 31% of employers are very likely to adjust plan assets to better match liabilities in 2015.

“A growing number of plan sponsors anticipate increasing pension plan costs due to recent changes to the Society of Actuaries longevity models and rising PBGC premiums,” says Ari Jacobs, global retirement solutions leader at Aon Hewitt. “Settlement strategies may be an appropriate approach for well-funded DB plans so that pension plan sponsors are able to honor the retirement benefits promised to participants, while also considering the long-term financial outlook of the plan.”

Aon Hewitt says its survey also revealed pension plan sponsors are increasingly adjusting plan assets to better match liabilities. More than one-third (36%) have recently made this shift, and of the remaining group, another 31% are very likely to make risk-based asset-allocation adjustments in the year ahead.

Rob Austin, director of retirement research at Aon Hewitt, adds that pension plan sponsors are thinking ahead and are taking actions now to better position themselves to manage volatility in their pension plans, no matter what the future economic environment brings. This presents an opportunity for plan advisers and consultants to bring in much-needed expertise to these plans, Aon Hewitt suggests, while putting pressure on plan sponsors to assess internal capabilities and whether outside talent is needed. 

In an emerging trend, Aon Hewitt says 45% of companies recently conducted an asset liability study to see how well pension plan assets are matched to anticipated liabilities. Of those plan sponsors that have not done so, 25% are somewhat or very likely to in 2015. More than one-quarter of plans now have an established glide path that increases exposure to fixed income securities and other risk-hedging strategies as the funded status improves.

The plan analysis doesn’t end there for plan sponsors, however, with 18% of companies performing a mortality study in 2014, and another 10% planning to do so in 2015. More than a quarter of pensions plan sponsors currently monitor the funded status of their plan on a daily basis, up from just 12% in 2013.

Other common trends emerging from the survey data show there is general accord among plan sponsors regarding expansion of their financial wellness focus, Aon Hewitt says. Most companies polled by Aon Hewitt (93%) say they are very or moderately likely to create or broaden their work around employee financial wellness topics, including in a manner that extends beyond retirement-specific decisions.

“Half of all companies believe the significance of financial wellness concepts has increased over the last two years,” the survey report continues.

Part of this effort involved improving other retirement plan offerings—specifically defined contribution (DC) arrangements. Aon Hewitt finds large employers in particular are looking to improve their DC plans, usually by leveraging their scale and size to get better pricing or expanded support from service providers. In this environment, products and services that provide savings and investing assistance to participants continue to gain favor, the report shows. By the end of 2015, Aon Hewitt predicts features such as online guidance, managed accounts, and phone access to financial planners or investment advisers will be the norm, not the exception.

As part of this effort, 30% of plan sponsors have recently moved from retail mutual funds to institutional share classes or separately managed accounts. Additionally, about two-thirds of all plan sponsors are very likely to review plan expenses and revenue sharing in 2015, Aon Hewitt says, and one-third are planning on changing funds in an effort to reduce costs.

Click here to access the ninth installment of Aon Hewitt’s annual plan sponsor benchmarking report. The content in the report is based on survey responses from nearly 250 employers, representing 6 million employees.