While there are several reasons pension plan sponsors are looking to address risk in their plans, reducing Pension Benefit Guaranty Corporation premiums remains a concern many plan to address in the coming year.
Close to one-quarter (22%) of plan sponsors say they are very likely to offer terminated vested participants a lump sum window in the coming year, according to recently released data from Aon Hewitt. In addition, 19% of employers plan to increase cash contributions to reduce PBGC premiums in 2015, and 21% say they will consider purchasing annuities for a portion of their plan participants.
According to Aon Hewitts data, 74% of companies currently have a defined benefit plan, and the status of these plans is evenly divided three different ways. A little more than one-third of the plan sponsors (35%) say they have an open, ongoing pension plan, and another third (34%) say their plan is closed to new hires, while the final third (31%) reports having frozen their plan.
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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.
Research points to most defined benefit plans continuing on their de-risking path in 2015, noting these de-risking actions will be concentrated on both asset and liability components. According to Aon Hewitt, plan sponsors will be increasingly adjusting investments to better match liabilities. Already, more than one-third have recently made this shift, and of the remaining plan sponsors, another 31% say they are very likely to do so in the year ahead.
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As plan sponsors move forward, many are continuing to monitor and eliminate risk from their plans. According to the study:
- 45% of companies recently conducted an asset liability study. Of those that have not done so, 25% are somewhat or very likely to in 2015.
- 18% of companies performed a mortality study in 2014; 10% plan to do so in 2015.
- 26% of companies currently monitor the funded status of their plan on a daily basis, up from just 12% in 2013.
Pension plan sponsors are planning 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, says Rob Austin, Aon Hewitts director of retirement research.
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Other experts agree that the movement in plan sponsors de-risking their plans is something that will continue.
De-risking was a trend in 2014, adds Matt Sicking, senior consultant at Towers Watson. We had a lot of de-risking this year.
