The vast majority (95 per cent) of defined benefit pension plan sponsors say higher inflation is impacting their decision to de-risk, with half (50 per cent) saying it’s very impactful, according to a new survey by MetLife Inc.
The survey, which polled more than 250 DB pension plan sponsors with at least $100 million or more in plan assets that have de-risking goals, found macroeconomic concerns, such as the geopolitical environment (96 per cent), market volatility (94 per cent), rising interest rates (91 per cent), the coronavirus pandemic’s transitional phase between pandemic and endemic (91 per cent) and inflation (86 per cent), are prompting plan sponsors to hold steady or even accelerate their plans to de-risk.
Read: 2022 Risk Management Conference: Navigating rising inflation, minimizing impact on pension plans
Indeed, 92 per cent of respondents said continued rising interest rates will make them more likely to move forward with a pension risk transfer, including 43 per cent that noted this move is much more likely if interest rates continue to rise.
Additionally, 93 per cent of respondents said their pension receives significant attention from corporate management because of the financial effects that volatility and related risks place on their balance sheet/income statement. In fact, 95 per cent said their company routinely weighs their DB plan’s value against the cost of the benefit.
The survey also found 64 per cent of respondents predicted the number of large pension risk transfer transactions will likely increase over the next five years and 18 per cent believe the high level will stay the same.
When asked about the type of pension risk transfer activity they’ll most likely use to achieve their de-risking goals, more than half (57 per cent) of respondents indicated they’ll use an annuity buyout, including more than a quarter (28 per cent) that said they plan to use a combination of an annuity buyout and a lump sum. That’s up significantly from two years ago when just roughly a third (34 per cent) said they’d use a buyout only or buyout in combination with a lump sum.
Read: Expert panel: How could inflation impact DB pension plans?
Among respondents seeking an annuity buyout, nearly two-thirds (62 per cent) said they’ll secure a buyout for a retiree lift-out, 21 per cent will secure a buyout for a plan termination and 17 per cent don’t yet know their approach. Moving forward, a majority of respondents said they’ll take a phased approach to de-risking, with two in three planning to tranche their transactions with a series of annuity buyouts (63 per cent) rather than a single annuity buyout transaction (37 per cent).
“The economic landscape has shifted significantly since our last poll and this change has led DB plan sponsors to take a closer look at their plans and pension risk transfer options,” said Elizabeth Walsh, MetLife’s head of pension solutions, in a press release. “Not only is inflation a factor, but other considerations, such as market volatility and rising interest rates, can potentially impact the decision to move forward with pension risk transfers.”
Read: Two decades of low inflation push DB pensions toward alternative investments: Bank of Canada