The Increasing Cost of Hope
“Hope springs eternal” is a familiar saying, and the sentiment is no stranger to the world of corporate pensions. The fortified interests that inspire hope and maintain the status quo are quite prevalent in the pension world. Unfortunately, for many plan sponsors, simply maintaining the status quo could result in an expensive discontinued operation on the balance sheet, lasting well into the future.
High Hopes Yield Lost Opportunity
It is understandable that CFOs have not wanted to be second-guessed for locking in the economics of a “hedge” when rates are low. But we believe CFOs and decision makers who can connect the dots related to changing external factors and see the entire picture will likely chart a different course – to reduce costs and risk. But those dots are not always connected today because those who advise on pensions are not positioned to weave the complete story together. Today, many effectively preach hope as a strategy. Of course, it is not phrased that way and hope is not a strategy. Current strategies are however, fraught with risk, coupled with increasing expenses and opportunity costs.
The elements of the story that need to be woven together, or the individual “dots,” are not foreign to CFOs. Each, in turn, is told individually in different conference rooms by different groups of investment bankers, actuarial advisors, asset managers and insurance companies. They include:
- Continued low interest rates
- The reduced corporate tax rate and other changes in the tax law
- Potential changes in the optimal capital structure for corporations
- Rising PBGC (Pension Benefit Guaranty Corporation) premiums
- The need to close funded status gaps
- Future increases in the cost of lump sums
- Increasing amounts of benefit payments for retirees
- Funded status volatility and the downside risk of well-funded plans
- Corporate finance benefits of reducing pension risk
To connect the dots, read our latest paper.