Plan sponsors feel tremendous pressure from their defined
benefit (DB) plans and are looking to reduce their risks, according to the Mercer / CFO Research 2015 Risk Survey, “Taking the Next Step in Pension
Risk Management: Planning to Move Ahead.”
In 2013, when Mercer conducted its previous survey, funded status improved to 88% due to rising interest rates and strong equity returns. However, in 2014, it fell to 79%, prompting 70% of DB plan sponsors in 2015 to contribute more than the required minimum amount to their DB plans. In addition, 59% of sponsors have offered some type of one-time lump-sum payment to DB plan participants, and another 49% expect to offer such a payment within the next two years.
More than one-third (36%) of DB plan sponsors expect to purchase an annuity either this year or in 2016. Twenty-two percent said they have closed their defined benefit plans to new hires, 26% have partially frozen their DB plans, and 16% have completely frozen their DB plans. Dynamic derisking is another strategy sponsors are taking, with 42% using this method and 39% considering it.
Given all of these measures, 90% of sponsors are very satisfied with the risk management actions they have taken.
The reasons sponsors said they are so proactive about lessening their risks include the fact that the Society of Actuaries increased its mortality assumptions; 37% of sponsors said this was a reason why they will be improving their pension funding policies in the next two years. Just over one-quarter (27%) also noted that the Pension Benefit Guaranty Corp. has increased its premiums.
“2014 was a game changer for the pension industry, with factors like new mortality tables and market volatility causing funded status to decline,” says Matt McDaniel, a partner with Mercer Retirement. “CFOs need to be attuned to an evolving pension market and use the best tools and resources available to develop DB strategies that make the most economic and strategic sense for their organizations.”
The findings are based on a survey of 213 senior executives that Mercer and CFO Research conducted in April and May 2015.