Report: Insured Pension Risk Transfer Solutions Stand to Rescue Struggling DB Plans

(December 5, 2011) — A new report by Dietrich & Associates claims that because many sponsors in the next few years will be focused on de-risking their pension program to predictably fund the plan over a series of years, struggling defined benefit pensions are poised to be rescued by insured pension risk transfer solutions. 

“Pension cost and volatility issues have led to the ‘freezing’ of benefits in almost half of corporate defined benefit pension plans,” commented Jay Dinunzio, Senior Consultant at Dietrich & Associates and the author of the new paper. “For this growing group of organizations, plan termination (and the associated required annuitization) is a clear objective that is challenged by recent low interest rates and unfunded liabilities. For many sponsors the next few years will be focused on de-risking their pension program in order to predictably fund the plan over a series of years. Inevitably, this shift will lead sponsors to shorten investment horizons and associated asset return targets, which may result in higher costs as a required trade-off to arrive at more certain outcomes. This paradigm shift towards liability driven investing in defined benefit plans is creating a compelling opportunity for insured pension risk transfer solutions to add significant value to the conversations that pension committees and consultants are having regarding fixed income investments.”

Dietrich & Associates’ findings highlight the increased popularity of liability-driven investing (LDI) among schemes seeking to de-risk in the face of market turbulence and added volatility. 

The report coincides with a study released last month by consulting firm Aon Hewitt, which found a continued trend of closure to DB accrual among UK schemes. “Just over 40% of the schemes surveyed have either already closed to DB accrual or are currently in the process of closing to future accrual,” James Patten, benefits design specialist at Aon Hewitt, said in a statement. “Nearly half of those that have closed to accrual, and indeed many of those that have not, are now taking pension risk management to the next phase. In some cases, this might simply be through implementing a liability management exercise such as an enhanced transfer value offer.”

The closure to DB accrual represents a greater focus on risk managements strategies among schemes. Mark Hyde Harrison, the new Chairman of the National Association of Pension Funds (NAPF), noted in October that DC pensions in the UK are inefficient and wasteful. In the UK, DC pensions have largely replaced final salary, or DB, pensions in the private sector. According to the NAPF, their importance is set to balloon ahead of new government rules that will force all workers to automatically enroll into the system.

Read Dietrich & Associates’ whitepaper here.