As employer-sponsored retirement plans are expected to see premium increases from the Pension Benefit Guaranty Corporation this year, along with a possibility of an unsteady market economy and longevity issues, retirement officials are urging plan sponsors to consider de-risking techniques.
According to Mercer, longer lives along with the higher PBGC premiums will likely warrant retirement plan sponsors and employers to answer problems of rising pension liabilities and additional fiscal responsibilities.
Mercer notes that plan sponsors need to consider investment policies and liability-driven investments, purchasing annuities for some or all plan participants and offering former employees lump-sum buyouts.
Increase in premium per participant is expected to reach $42 in 2013 and $64 by 2016. Also, per $1,000 of underfunding, plan sponsors will see an increase in variable premiums from $9 in 2013 to nearly $30 in 2017. The PBGC premium increase is a part of the two-year federal budget deal approved in late 2013.
It has generated some excitement, and not good excitement, says Richard McEvoy, a partner in Mercers financial strategy group. [The plan sponsors] are doing what they can to reduce them through prefunding and risk transfers.
With a proposal by President Barack Obama to include another $20 billion in premium increases in the countrys 2015 budget, Geoff Manville, a Mercer principal within the companys Washington resource group, says that it it just illustrates to the extent that lawmakers and the President are willing to raise premiums.
According to the PBGC, premium rates jumped up by $6 per participant in 2014 and $5 per $1,000 of unfunded vested benefits for single-employer plans. The single-employer rate increase was previously laid out in the Moving Ahead for Progress in the 21st Century Act, the PBGC says.
Its a tempting target for the administration, says Manville. The bottom line is we may see some premium increases in the future, but it will not be in the order of $20 billion.
When looking at the longer-living participant, Mercer estimates that new mortality projections point to pension liability increases between 2% and 8% over the next few years. Gordon Fletcher, a partner in Mercers financial strategy group, says that new estimates point to individuals living to 87-years-old or slightly longer in some cases.
Additional options for defined benefit plans is to consider liability-driven investing and glide-path investment schemes that can trigger asset allocation changes at specific funding levels. Given the benefit of these investment options, Mercer says that frozen pension plans can also take on this opportunity. The Clorox Company which had more than $5.6 billion in sales in Fiscal Year 2013 within its cleaning, household, lifestyle and international consumer product lines has been using these strategies since it froze its pension plan in 2011. The company now complements the DB plan with a 401(k) option for new enrollees.
Chip Conradi, treasurer and vice president of tax at Clorox, notes that one of the biggest challenges was education, and translating information to company committee members that could achieve the best interests of plan participants.
Mercer executives also highlight that pre-funding retirement benefits can afford plan sponsors benefits as well.
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