June 9, 2014 (PLANSPONSOR.com) - Eight in 10 defined benefit (DB) plan sponsors expressed interest in pension risk transfer products.
survey by the LIMRA Secure Retirement Institute found, of the nearly 400 DB
plan sponsors surveyed, one in five were unfamiliar with pension risk transfer
products, and another 50% were only somewhat familiar with pension risk
transfer products. Plan sponsors more familiar with the products were more
interested in them, as were plan sponsors with frozen DB plans.
survey found half of the traditional DB plans were still open to new
participants, while 36% of plans were partially frozen and another 14% were
fully frozen. Plans with more than $250 million in assets were more likely to
be open to new participants than smaller plans (69% vs. 47%). The research
revealed only 6% of plan sponsors said they plan to freeze their DB plan within
the next two years.
majority of plans sponsors surveyed (55%) use a liability driven investment
strategy (LDI) to mitigate the financial risk of their DB plan. Other employers
said they considered or implemented risk settlement options like lump-sum
payouts and group annuity buyouts.
DB plan sponsors not very or not at all interested in pension risk transfer,
the top reason is lack of knowledge. Other reasons given by plan sponsors for not
considering a pension risk transfer product include using another method to
address the risk, purchasing costs of annuities, and potential negative
perceptions by stockholders.
“There is a
misconception that the cost of transferring the risk through an annuity would
be prohibitive but recent analysis by Mercer found that it was slightly cheaper
for a plan sponsor to purchase a buyout for the retiree portion of its plan
than it was to keep it in-house,” notes Alison Salka, senior vice president and
director of the LIMRA Secure Retirement Institute (see “DB Sponsors Should Not Be Reluctant to Transfer Liabilities”). “We expect the growing impact of DB plans on
balance sheets is going to drive more CFOs and others in finance to learn about
and consider pension risk transfers in the future.”