DB vs DC Savings: About 3% per Year

That’s the payroll difference for plan sponsors who choose to freeze their pension plans, according to a study.

(November 25, 2013) – Freezing a corporate defined benefit (DB) pension plan would save 3.1% of total firm assets, on average, over a 10-year time horizon, researchers have said.

That figure was the net savings calculation, and takes into account the additional defined contribution (DC) matching payouts that most firms take on after closing their pension programs to new members.

The study, published as a working paper in the US Federal Reserve’s finance and economics discussion series, had three co-authors: Stanford University Finance Professor Joshua Rauh, Fed Economist Irina Stefanescu, and Columbia University Professor Stephen Zeldes.  

The researchers primarily sourced the raw data from Form 5500, a mandatory annual filing by plan administrators with the US Department of Labor and Internal Revenue Service. Rauh, Stefanescu, and Zeldes restricted their analysis to US-based plans with at least 1,000 active participants.

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The dataset spans the years 1999 through 2010, and includes 213 schemes which were frozen during that time period, in addition to some which remained open.

Comparing the what these plans would have accrued if not frozen to the actual increase in 401(k) and other DC contributions for firms that freeze, the authors found only partial compensation to employees for the lost DB benefits.

“Net of the increase in total DC contributions, firms save between 2.7 % and 3.6% of payroll per year,” the researchers wrote. “Workers would have to value the structure, choice, flexibility, or portability of DC plans by at least this much more to experience welfare gains from freezes.”

Furthermore, they found that firms with potentially more assets to save were also more likely to undertake a plan freeze and switch to DC.

The authors did acknowledge that “there are still many other factors that enter a firm’s decision to freeze, including the impact on the volatility of cash flows, the demand of employees for more portable benefits, and the relative effects of the two types of plans on reported accounting income. The relative importance of these effects compared to the desire to save costs remains an open question.”

Read the full paper, “Cost Shifting and the Freezing of Corporate Pension Plans,” here

Related Content: The World’s 50 Most Admired Companies: How Many Have DB Plans? 

Alaska Permanent Awards EM Mandates

The Alaska Permanent Fund Corporation has appointed William Blair, JP Morgan, Lee Munder Capital Management, and Delaware Investments.

(November 25, 2013) — Four new emerging market equity mandates have been awarded by the Alaska Permanent Fund Corporation (APFC) after the fund decided it needed to diversify the asset class further.

The APFC fund has $3.2 billion in emerging market stocks, according to its annual report from September 2013, and has awarded $100 million mandates to each of the four new managers.

In the growth style section of its emerging market equities, APFC appointed JP Morgan and William Blair, while Lee Munder Capital Management and Delaware Investments received mandates for the value style section.

Selective rebalancing within existing mandates will provide the funds for the new mandates, and no existing manager contracts were terminated.

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The emerging market equities sector of APFC’s portfolio endured a tough year in 2013, but managed to outperform its benchmark.

As investor sentiment drove away from emerging market stocks following a slowdown in the Chinese economy, APFC’s emerging equities returned 3.8%, versus a 3.2% benchmark.

The annual report also showed the total returns for the fiscal year reached 10.9%, resulting in assets under management of $44.9 billion.

Jay Willoughby, CIO of the Alaska Permanent Fund Corporation, ranked 28 on this year’s Power 100.

In 2011 APFC introduced an external CIO program, which saw funds allocated to Bridgewater Associates, Goldman Sachs Asset Management, GMO, PIMCO, and AQR. The firms were given broad mandates to invest across traditional portfolio buckets.

This year Willoughby added Carlyle to that list, allocating $750 million to the private-equity giant to focus on energy investments.

Related Content: Alaska Permanent Launches Private External-CIO Program and Power 100: Jay Willoughby  

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