Reducing Pension Risk: The Five Myths Holding Back Plan Sponsors

Pension plans are subject to significant volatility, and by and large, history has not been kind to U.S. plan sponsors. In fact, twice since 2000, America’s corporate defined benefit (DB) plan sponsors have seen their plans’ funded status deteriorate over 30% in market downturns. These declines have compelled the 100 largest corporate pension plans in the U.S. to contribute approximately $315 billion to their plans between 2009 and 2014. Pension shortfall, potential cash contributions over time, and rising stakeholder concern over financial statement volatility and reduced strategic flexibility are making many firms consider strategies to reduce their exposure to pension plan risk—or in some instances, divest it altogether.

This article examines the driving forces behind the intensifying interest in pension risk management solutions. It explores how accounting transparency, regulatory changes and increased scrutiny by shareholders and analysts are contributing to the trend of pension de-risking, and how finance executives’ awareness of—and interest in—pension risk management remains high.

Most importantly, this article identifies and dispels several myths that are precluding some plan sponsors from taking action to de-risk their plans. Despite two groundbreaking transactions in 2012 and a marketplace that is primed for a surge of de-risking, many plan sponsors remain indecisive, and this paper lays bare the erroneous assumptions that are preventing them from unburdening themselves of onerous pension obligations.