Articles

Pension Plan Sponsors Continue to Search for Ways to Reduce Liabilities

In an environment where defined benefit pension plans are seeing rising costs from declining interest rates, rising participant longevity/mortality, and rising Pension Benefit Guaranty Corporation premiums, most pension plan sponsors are looking for ways to manage, or eliminate, their defined benefit liabilities and their annual pension expense. 

In fact, many plan sponsors have chosen to freeze, or even cut, benefits in response to these rising liability costs. Lump sums have been a popular method of reducing future pension liabilities, eclipsing plan terminations and pension buy-outs. Fifty-four percent of defined benefit plans have already executed lump sum programs with another 26% planning to offer one in the near future, according to responses from a 2019 industry survey. Of those offering lump sums, over 67% intend to also offer them to existing retirees due to Internal Revenue Service guideline changes in 2019.¹

Pension risk transfers have become increasingly popular. In a recent LIMRA Secure Retirement Institute study, 80% of private-sector plan sponsors who offered both defined benefit and defined contribution plans said they were interested in exploring pension risk transfer strategies.² Over 2018-2019, LIMRA estimated that over $50 billion in liabilities had been transferred to insurance companies. ³

LIMRA also found that four of 10 of their survey respondents said that they were also pursuing Liability-Driven Investment (LDI) strategies where assets are used to hedge against the growth of the liabilities. In a 2019 NEPC study, 58% of defined benefit plans with a 90% funded status (the ratio of plan assets to liabilities) used LDI, compared to just 46% in 2017.¹

One explanation for the increasing popularity of these strategies has been the strong stock and bond market performance, and using LDI to “lock in” these market gains. However, another consideration is the increasing volatility of plan funded status – from not only the markets but also in the liabilities as plan assumptions and regulatory changes have moved the goal posts – which adds to plan sponsors’ frustrations in acting quickly to take advantage of de-risking windows. This has also led more plan sponsors to hire LDI managers or outsource chief investment officer roles to investment consultants.  

To learn more about how we can support you and your clients in this area, please contact your Newport representative.


Sources:
¹ https://www.plansponsor.com/ldi-key-db-plan-funded-status-gains/
² https://www.fa-mag.com/news/pension-risk-transfer-gaining-popularity-with-plan-sponsors-51512.html
³ https://www.pionline.com/pension-risk-transfer/number-plans-passing-liabilities-expected-rise

Newport Group, Inc. and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services. 

For Plan Sponsor Use Only.


20191218-1032198-3132850

Copyright © 2015-2021 Newport Group, Inc.  All rights reserved.
Unauthorized access is prohibited. This site is designed for U.S. residents only.

Newport Group, Inc. and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services.
Investment Advisory and fiduciary consulting services are offered through Newport Group Consulting, LLC, a registered investment adviser and wholly owned subsidiary of Newport Group, Inc.
Securities are offered through Newport Group Securities, Inc., a dually registered investment advisor and broker dealer, member FINRA and affiliate of Newport Group, Inc. Securities in California are offered under the Newport Securities Insurance Services. See BrokerCheck for more information. Other insurance products may be offered by Newport Group, Inc.
For more information about Newport Group Consulting and its services, please refer to our Form ADV Part 2A.
Newport Trust Company, is a New Hampshire state chartered trust company and wholly owned subsidiary of Newport Group, Inc. Newport Trust Company provides independent fiduciary and trustee services for employee benefit plans.