American plan sponsors have been spurred to action by a perfect storm of pressures on their DB plans, finds the Mercer/CFO Research 2015 Risk Survey.
In the two years since the last survey, many companies have moved to action in managing risk and mitigating funded status volatility.
Read: Top 100 Pension Funds Report: Still got some spark
Risk transfer trends
Fifty-nine percent of sponsors have already offered some type of one-time lump sum payment to vested DB plan participants. This trend seems set to continue, as 49% of survey participants stated their companies are likely to employ some form of lump sum payout in the next two years.
Annuity buyouts may also be on the rise—36% of this year’s respondents state they are likely or very likely to purchase an annuity in either 2015 or 2016.
Read: DB buyouts expected to grow
The changing pension landscape
During 2013, funded status improvement was attributed to rising interest rates and buoyant equity returns. Those gains were short-lived, however, as funded status plummeted from 88% to 79% throughout the following calendar year.
In the future, 70% of sponsors plan to contribute in excess of the minimum required amount. The main reasons influencing DB activity cited by 2015 survey participants included:
- Mortality assumptions: The Society of Actuaries updated its mortality assumptions in late 2014, reflecting an increase in longevity. These new tables were cited by survey participants as the leading impetus for sponsors (37%) when considering modifications to pension funding policies and practices in the next two years.
- Funded status: Total funding deficit in 2014 rose and aggregate funding levels sank to 79%, a decline of nine points from the previous year. Funded levels have subsequently improved to an aggregate level of 84% at the end of the second quarter of 2015.
- Pension Benefit Guaranty Corp.premiums hike: Though not quite as influential as other factors, 27% of sponsors reported that rising premiums would affect changes in their funding policies.
Read: How to cope with low interest rates
Risk reduction as a multi-pronged approach
Interviews conducted as part of the risk survey demonstrated that many financial executives were implementing a staged approach to plan management, dividing up plan participants into segments to address separately or creating mid-range goals to achieve equilibrium.
In just a few years, dynamic de-risking has moved from cutting edge to mainstream: 81% percent of sponsors indicated they had either adopted (42%) or were considering (39%) a dynamic de-risking strategy to reduce risk as funded status improves. Those that implemented dynamic de-risking were almost universally satisfied with the outcome (87%).
Twenty-two percent say they have already closed plans to new hires, and one- quarter (26%) have either partially (10%) or completely (16%) frozen their DB plans to get themselves “on sounder footing.”
Overall, the 2015 risk survey data showcased that plan sponsors have strong desire and commitment to improve funded status and stay on course with additional DB risk management efforts in 2015 and 2016.