De-risking defined benefits plans needs to be a corporate priority

In 2012, Ford and General Motors blazed a new path for companies seeking to reduce pension obligations and balance sheet volatility. Both companies reportedly offered lump-sums to tens of thousands of vested retirees and former employees, as well as implementing other de-risking strategies. While these actions sparked interest among defined benefit plan sponsors, many sponsors were prevented from acting by persistently low interest rates and other factors which negatively affected plan liabilities and limited the benefits of stock market gains.

While waiting for more favorable circumstances to develop, many plan sponsors assembled plans and strategies to mitigate and manage the risks associated with their plans. Today, rising interest rates and strong stock market performance have improved funding ratios and created an environment in which plan sponsors can — and are — acting decisively.  

DB pension plan de-risking is not a new idea. A growing number of U.S. employers have formalized their de-risking strategies by developing “journey plans.” These blueprints for removing risk simplify the implementation process by including pre-approved actions that may be taken when clearly defined triggers are reached.  Journey plans are important because they eliminate the need to repeat the decision-making processes over and over again.

Today, improved funding status has given plans the flexibility to pursue de-risking activities, and created circumstances in which less cash may be required to pursue settlement activities. Throughout 2013, plan funding levels showed steady improvement. An 87 basis point increase in the discount rate and an 11.2% investment gain pushed the average funding ratio of plans in the Milliman 100 Pension Funding Index from 81.3% in January 2013 to 95.2% in December 2013. It was the best year for pension plans in the 13-year history of the Index.

Despite a stock market setback in January 2014, an Aon Hewitt report found that “employers continue to aggressively monitor and mitigate risks in their defined benefit plans. Generally speaking, their actions fall into four categories: understanding the risks, monitoring the results, decreasing the liabilities and syncing the assets’ movement to match liability changes.”

According to the report, many DB plan sponsors are reducing their liabilities, or plan to, by making lump-sums available to terminated vested participants and/or retirees. According to the survey:

• 12% of sponsors have recently completed a window offering lump-sums.

• 43% of those who have not offered lump-sum options are very or somewhat likely to offer a window in 2014.

• 13% of employers have expanded lump-sum options and now permanently offer them to participants.

Many DB plan sponsors also have adjusted their investments to better match the plan liabilities or expect to do so soon.
It is time for plan sponsors to take action to reach their risk management goals. Successfully implementing a de-risking strategy requires careful planning and thoughtful execution. Plan sponsors should be certain they understand and can address the challenges that often accompany the implementation of a de-risking solution such as ensuring they have accurate plan participant data or knowing the best ways to deal with missing or nonresponsive former employees.

Terry Dunne is senior vice president and managing director of rollover solutions group at Millennium Trust Company, a financial services company offering alternative custody solutions to institutions, advisers and individuals. Follow Millennium Trust Company on Twitter @mtrustcompany.