Almost two-thirds (62 per cent) of U.S. defined benefit plan sponsors are seeking to exit their plans, while 33 per cent are looking to achieve self-sufficiency and just five per cent are planning to keep their plans open, according to a survey by State Street Corp.
Among DB plan sponsors eyeing an exit, the survey found 63 per cent said it was primarily because the pension is viewed as a legacy asset that adds little value. In exiting their plans, 45 per cent of these respondents said they’re likely to pursue partial buyout risk transfers along the way, while 27 per cent plan to explore some form of delegation to an asset manager.
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More than half (52 per cent) of respondents seeking self-sufficiency said they somewhat or strongly agree that while working toward a long-term runoff, they may still decide to change course and opt for an exit, though the costs are too high to make this a viable option today. However, the same percentage of self-sufficiency seekers also somewhat or strongly agreed their pension is a differentiating corporate asset, suggesting they’re not ready to give up on their plan just yet.
Among respondents seeking to keep their pension plans open, 84 per cent were well-funded — defined as between 80 to more than 100 per cent — and 16 per cent were underfunded. When asked if the coronavirus pandemic has impacted their time frame for achieving long-term pension plan goals, 44 per cent said their timeline had been delayed.
When it comes to inflation risk management, 56 per cent of well-funded plan sponsors said that dimension of plan oversight is aligned with long-term goals. Notably, fewer than a third (31 per cent) of plans that were underfunded agreed, likely because of these sponsors’ reliance on growth assets, which makes their plans most susceptible to loss in inflationary environments.
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Additionally, 62 per cent of DB plan sponsors said they’re not planning to fully outsource their plan oversight within the next three years, while 18 per cent said they’re likely to do so, 16 per cent were neutral on the subject and four per cent said they already have outsourced their plan oversight. Among plan sponsors that also manage defined contribution plans, more than half (56 per cent) said they’re unlikely to fully outsource their DC plan oversight within the next three years, while 25 per cent said it was likely, 10 per cent were neutral on the subject and the same percentage said they’d already done so.
The survey also asked plan sponsors for their top reasons in outsourcing their DB and DC plans. The results included: their in-house teams were under-resourced (65 per cent and 69 per cent, respectively); for support with environmental, social and governance investing (52 per cent and 56 per cent, respectively); to manage pension operations and administration more efficiently (52 per cent and 53 per cent, respectively); to reduce asset manager fees (24 per cent and 34 per cent, respectively); to improve portfolio risk management, (24 per cent and 34 per cent, respectively); to address governance shortcomings (23 per cent and 33 per cent, respectively); and to increase access to alternative asset classes (20 per cent and 16 per cent, respectively).
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