- The reasons for funding are changing: 80% of plan sponsors have accelerated funding, largely due to increasing Pension Benefit Guarantee Corporation (PBGC) fees and the prospect of lower corporate taxes;
- Most companies now have a formal de-risking strategy: A majority of respondents say they now have a dynamic de-risking investment strategy in place and are moving forward with risk transfer projects;
- Plan terminations are increasing: Almost 60% of respondents claim they are considering plan termination within the next ten years. In the 2017 survey findings, about 59% indicated their timeline to consider termination was 10 years or less, whereas the 2015 survey results revealed only about 46% made such considerations.
DB plan funding: choices and trade offsNearly 80% of respondents say they are now contributing more than the minimum level of funding to their DB plans either because they want to reach specific thresholds or because they aim to fully fund the plan over a shorter period of time than regulations require. PBGC premiums tripled between 2011 and 2016 and are expected to quadruple by 2019 - which has had a notable effect on plan sponsors. When asked about reasons why they either have increased funding or would consider doing so, 40% of respondents decided to increase funding to reduce the cost of future PBGC premiums, and nearly 33% are also considering funding for that same reason. That combined total of nearly 73% is a notable increase from the 2015 survey results, which found only about 60% citing PBGC premiums as a deciding factor to fund above requirement. "Rising PBGC premiums coupled with potentially falling tax rates really improves the business case for advance funding." said Scott Jarboe, Partner, Mercer. "Even those sponsors without significant cash on hand are finding that borrowing at attractive rates to fund the DB Plan can have a significantly positive ROI, while not increasing their total debt load." DB strategy evolves As many plan sponsors freeze or close plans, their eye moves toward an ultimate destination. Almost 60% of survey respondents intend to terminate their plans within the next ten years. Most have a funding deficit they must overcome first. Closing the funding gap requires a thoughtful process to balance risk with the prospect of large cash infusions. "Sponsors who want to develop a successful pension exit strategy have to make sure they create a process that evaluates and changes the asset allocation, lowering pension risk as frozen plans move closer to termination." added Mr. McDaniel. "DB Plan sponsors should weigh considerations such as the plan's objective, their time horizon, the magnitude of their obligations and the state of the economy."
More than eight in ten respondents say they either have a "dynamic de-risking strategy in place" (42%) or "are currently considering one" (40%), citing a desire to avoid volatility in their financial statements as a main reason. Over half of respondents (55%), however, say they struggle with finding enough internal resources to manage their pension plan. As such, 52% of those surveyed delegate some or all investment execution to a third party through an Outsourced Chief Investment Officer (OCIO) model.DB or not DB? Companies continue to weigh the benefits and obligations of maintaining pension plans. The legacy obligation heavily affects balance sheets, and for those who have frozen plans, the employee attraction and retention qualities of pensions are diminished. Companies need to consider the cost of maintaining a pension plan (including PBGC premiums), the degree to which it is funded, and the price of settling liabilities. Nearly 75% of Mercer's survey respondents say they have already offered lump-sum payments to certain participants since 2012 - up from 59% from the 2015 Mercer CFO survey findings. About 50% of all respondents consider it likely that their companies will take some form of lump-sum risk-transfer action in the next couple of years - for many of these sponsors, this will be a second or third lump-sum offer. A significant number of sponsors have implemented an annuity buyout for some pension participants, where an insurer assumes responsibility for the sponsor's retirement liabilities. Among survey respondents, more than half (55%) have either completed such an annuity buyout or are considering it. Many companies are held back by the misconception that such annuities are either "expensive" (37%) or "very expensive" (25%). Specifically, these respondents estimate that the cost of an annuity would require their pensions to post a Projected Benefit Obligation (PBO) of over 110%. However, Mercer's experience as the market leader in annuity placements shows that the majority of transactions occur between 100% and 110% of PBO.
The full report can be found here: https://www.mercer.com/our-thinking/wealth/adventures-in-pension-risk-management.htmlAbout the survey methodology The survey collected 175 responses, mostly from CFOs, CEOs and Finance Directors, with 80% of responses representing DB pension plan assets of between $100 million and $5 billion. More than half (53%) of respondents represent companies with annual revenues of between $500 million and $5 billion. Respondents come from a broad range of industries, with the most sizeable clusters in aerospace/defense and business/professional services. About Mercer Mercer delivers advice and technology-driven solutions that help organizations meet the health, wealth and career needs of a changing workforce. Mercer's more than 22,000 employees are based in 43 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With more than 60,000 colleagues and annual revenue over $13 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer. About CFO Research CFO Research, an Argyle company, has been a trusted source of insight into the business issues that matter most to finance professionals since its founding in 2000. CFO Research is the sister firm of CFO Magazine, and relies on senior finance executives to share their experiences, insights, and observations on critical business issues. This cutting-edge research supports critical business decisions by our sponsors, as well as their thought leadership positioning and marketing efforts. Important Notices2017 Mercer LLC. All rights reserved. References to Mercer shall be construed to include Mercer LLC and/or its associated companies. Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not constitute an offer to purchase or sell any securities.
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