More Corporate DB Plans Want to Dump Liabilities ASAP

As the amount of annual risk transfers continues to increase, a large number of corporate pension plans are looking to fully divest their defined benefit liabilities within five years.

The methods of choice for these companies are group annuity contracts and structured buyouts, or lump-sum payouts, both of which help prop up their funded statuses, according to MetLife’s 2019 Pension Risk Transfer Poll. The deals allow the businesses to pass off their retirement assets to an insurance company.

Out of 102 defined benefit pension plan sponsors surveyed, more than one-third want to fully divest their liabilities within five years (10% within two, 24% in two to five). In the latter bracket, 17% have more than $1 billion in assets.

Wayne Daniel, MetLife’s senior vice president and head of US pensions, told CIO that “recent economic and regulatory changes” are causing more companies to take “concrete steps” to de-risk their pension plans.

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He points to higher fees that the Pension Benefit Guaranty Corp. (PBGC), the federal agency that insures private sector pension benefits, charges DB sponsors. These are the “primary catalyst for plan sponsors to initiate a pension risk transfer to an insurance company (55%).” The PBGC’s motivators include premium increases (52%) and a change in the premium methodology, which now adheres to a risk-based formula (18%).

Other risk transfer drivers are interest rate changes (42%) and funded status reaching a predetermined level (29%).

Almost half of the corporate DB plan sponsors, however, want to take their time with total liability divestment and wait more than five years. Additionally, roughly one-quarter of these plans don’t want to eliminate their liabilities at all.

“De-risking can and should be viewed as a spectrum of choices—rather than a “once and done” transaction—with a basic non-guaranteed liability driven investing (LDI) (or asset liability management) strategy at one end of the spectrum to a full pension buy-out at the other end,” Daniel said.

He added that when thinking about a potential de-risking strategy, plan sponsors and CIOs should “determine what they are trying to accomplish with their plan, where the plan fits in with other qualified plans they offer, and how they can achieve the firm’s business and talent retention goals, in light of the macroeconomic environment, in a way that addresses the organization’s strategic focus and meets the needs of the plan participants.”

Tags: LDI, MetLife, Pension, Pension Risk Transfer, Wayne Daniel

While the Davos set wrings their hands over pessimistic global economic forecasts, Guggenheim Partners Global CIO Scott Minerd offers a contrary view, saying concerns about a global recession are exaggerated and that “if anything, the outlook is brightening.”

In a recent note to clients, Minerd concludes that the collective financial brainpower that congregates each year at the World Economic Forum in Davos, Switzerland, provides valuable predictive views, albeit in a contra-indicatory fashion.

“The amber lights flashing in Davos are signaling the consensus view that global growth is slowing,” wrote Minerd. “Given past experience, this may be the signal that the economy is likely to re-accelerate soon and that the party in risk assets continues.”

Minerd points out that last year “the air was electric with the bullish outlook for global growth,” as stocks surged ahead on the euphoria of a massive tax cut in the US. However, he adds, “we did not have to wait long as stocks fell into a sickening plunge in February.”

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He also notes that two years ago, when the combination of a widening spread between credit securities and lower-risk assets, falling oil prices, and a stock sell-off led many pundits to predict that a bear market was about to rear its ugly head, the bull market kept barreling forward.

And in 2016, when the hot topic at Davos was the emergence of Africa as an important component of future global growth, he says the immediate experience proved to be a disappointment for investors.

But Minerd backs up his view with more than just the fact that the folks at Davos have proven to be poor soothsayers in recent years.

He notes that while global growth is slowing, it is “still plowing ahead,” and that although growth in the US will probably slow, he believes it will remain “at or ahead of potential in 2019.” He also said that the US Federal Reserve will most likely remain unchanged well into the second quarter with the market pricing in a possible rate cut if necessary to sustain growth.

He adds that while Germany may be entering a technical recession, Chancellor Angela Merkel has called for new tax cuts. “Of all nations that can afford fiscal stimulus, Germany stands at the head of the class,” said Minerd. “It has a history of fiscal discipline and is well-positioned to deliver.”

And despite a slowdown in growth in China, he said that Chinese equities have recently stabilized after a long slide, and are beginning to offer value relative to their global counterparts.

“While I concur with my colleagues here in Davos that a synchronized global slowdown is underway, fears of recession are overblown,” said Minerd. “The somber mood of Davos could again prove to be a contra-indicator,” he added, noting that “policymakers are beginning to awaken to the mounting risks arising from a protracted trade war and increasing nationalism.”

Tags: Davos, Guggenheim, recession, Scott Minerd