What Step Will You Take?

Despite recent historically strong asset performance, many companies with underfunded pension plans are finding it difficult to earn their way out of pension deficits. One contributing factor is that retirees comprise roughly 50% of total liabilities for the average plan. To fulfill these obligations, a significant amount of benefit payments need to be made each year from plan assets.

A resurgent economy, strong equity markets and modestly higher interest rates are providing a tailwind to pension plan sponsors. The change in economic sentiment is driven in large part by expectations that companies will get a boost to cash flow from lower corporate tax rates, infrastructure spending and reduced regulations under the new administration.

Longevity improvements have slowed materially in the retired population, according to the Continuous Mortality Investigation. But anyone looking at today's CMI model and believing they now know for certain that their liabilities are lower need to remember there is risk in retaining longevity exposure.

In the second half of 2016, more than $3.2 billion of pension contributions were made using a borrow-to-fund strategy. Despite a recent rise in interest rates, borrowing to fund remains a compelling strategy.