Means and Markets Have Aligned: Why You Should Consider De-risking Now

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.

Why De-risk Now?

There are numerous reasons why now is the right time to de-risk, including:

Pension Benefit Guarantee Corporation (PBGC) premiums—both flat-rate and variable rate—have increased significantly and are a cash drain for plan sponsors.

Source: PBGC

Alternate text for graphic: Shows the increasing Pension Benefit Guaranty Corporation (PBGC) premiums from 2010 to 2019, flat rate and variable rate.

Table caption: PBGC Annual Premiums from 2010-2019

Table summary: Flat and variable PBGC annual premium amounts from 2010-2019

Year

Flat Rate Premium
(per participant)

Variable Rate Premium

(per $1,000 underfunded)

2010

$35

$9

2011

$35

$9

2012

$35

$9

2013

$42

$9

2014

$49

$14

2015

$57

$24

2016

$64

$30

2017

$69

$34

2018

$74

$37

2019

$80

$42

An improved outlook for growth and gradual Federal Reserve monetary tightening policies have helped equities advance and interest rates recover from their mid-summer lows. The average plan is now 85% funded, compared to 79% one year ago,1 and funded status is expected to further improve.


  Source: Milliman 100 Pension Funding Index, March 2017.

Table caption: Shows the volatile funded status of the 100 largest U.S. pension plans from 2000-March 2017.

Table summary: Shows the funded status for the Milliman 100 (the 100 largest U.S. pension plans) in various years from 2000 to March 2017.

Year

Funded Status

2000

123.1%

2002

82.0%

2007

105.8%

2012

77.1%

2013

88.0%

March 2016

78.6%

March 2017

85.3%


As funded status improves, plan sponsors face an increasingly asymmetric risk and reward profile. Sponsors that retain risk assets as funded status improves receive diminishing economic benefits as excess funds cannot be used for other business purposes while downside risk grows.

De-risking Options

Plans that are well-funded may want to consider a pension buy-out to address pension risk. In recent years, sponsors have focused on transferring liabilities associated with retiree populations, which are the most efficient to buy out.

Plan sponsors with underfunded plans have multiple solutions. They can either target a specific population to buy out today, or take advantage of a borrow-to-fund strategy and issue debt to improve the funded status of their plans, before embarking on a de-risking strategy.

Learn more by reading our whitepaper. 

 

REFERENCES

  • 1 Milliman 100 Pension Funding Index