More defined benefit plan sponsors are actively de-risking and exploring new investment governance structure due to volatile markets and uncertain costs, according to a biennial report from Mercer. The report also found that rising Pension Benefit Guaranty Corporation (PBGC) premiums are having a significant effect on funding decisions.
The report found that 84% of plan sponsors are using a dynamic de-risking strategy or are planning to do so, while more than 50% of sponsors surveyed intend to move in this direction by increasing exposure to fixed income, extending duration, and hibernation. And 76% of respondents said it was likely or very likely they will offer a lump sum cash-out option buyout of their pension benefit by the end of this year, or in 2020.
“Given the challenges of increased market volatility and uncertain costs plan sponsors face today, many are reevaluating how they want to achieve their long-term pension plan goals,” Matt McDaniel, head of Mercer’s US Financial Strategy Group, said in a release. “We are seeing many sponsors take a critical look at their strategic roadmap, including the supporting policy actions and governance structures that will guide them into the future.”
According to the report, a decade-long bull market led to an increasing number of plan sponsors seeing improvements in their funded status, which has made it more economically feasible for many defined benefit plans to actively de-risk and rethink their investment governance approaches.
As a result, plan sponsors are increasingly turning to annuity buyouts, and the cost of transferring all or a portion of retiree obligations to an insurer through the purchase of an annuity is proving to be less of a barrier. According to Mercer, 70% of survey respondents said they’re likely to transfer some or all of their retiree obligation from their defined benefit plan through the purchase of an annuity in 2019 or 2020, up from 56% who said so just two years ago.
Strong stock market returns are not the only thing pushing funded levels higher, according to the survey, which found PBGC premiums have become a primary driver of pension funding strategies for many employers as improving a plan’s funded level can reduce PBGC premiums. Approximately 85% of survey respondents said they either made contributions above their minimum requirements in order to reduce the future cost of PBGC premiums, or are considering doing so, up from 73% in 2017, and 57% in 2015.
Additionally, some 63% of plan sponsors say they will terminate their plans within the next five years, a sharp rise from the 38% who planned to terminate their plans within five years in 2015. Mercer said this increase has been spurred by the improvement in plans’ funded status, as well as interim risk management steps taken.
Despite the improved funded status of most plans, fully funded status still proves to be elusive for a vast majority of plans as only 23% of survey respondents reported that their plans were fully funded or above 100% funded. However, this percentage is up from 13% in 2017.
The survey responses came from 155 senior executives including CFOs, CEOs, and finance directors, all based in the US and representing a wide range of industries. Just over half the respondents represent organizations with annual revenue of between $500 million and $5 billion.
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