Reducing Your Pension Risk

Corporate plan sponsors continue to grapple with the risks and rising costs associated with managing and maintaining their pension plans. With the possibility of corporate tax reform on the horizon, plan sponsors may have a unique opportunity now to reduce PBGC expenses by accelerating funding and to deduct contributions at the current higher tax rate, resulting in a low risk, positive net present value outcome.

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.