Following U.S. lawmakers’ move to increase the variable rate
premiums charged by the Pension Benefit Guaranty Corporation (PBGC), nearly half of America’s pension plans are considering lump-sum payouts.
This is according to the 2016 Defined Benefit Plan Trends Survey by investment consulting
For those plan sponsors considering other risk
reduction measures, 27% said they plan to issue annuities. Twenty-five percent
are considering higher contributions. Thirty-nine percent of respondents weren’t
planning any changes at the time the survey was taken.
“The real game changer was what occurred at the end of last
year with the PBGC rate premium decision, and plan sponsors have been
scrambling on what to do ever since,” observes Brad Smith, partner in NEPC’s
Corporate Practice. “Our expectation is that this anxiety about the rate premiums
will continue, regardless of who is in the White House. We continue to advise
clients on best approaches to improve or maintain their funded status in a
low-yield environment, even with a slight rate increase expected before the end
of the year.”
As projected, longevity increases
are affecting pension funding. In 2016, the number of defined
benefit plans with a funded status less than 80% increased to 28%, from 21% in
2015. Forty-three percent of plans have a funded status of at least 90%.
percent of respondents considered issuing debt to improve
47% of these plans have a funded status of less than 80%.
The firm also points out that while a majority of plan sponsors (69%) are
hedging interest rate exposure using liability driven investing (LDI)
strategies, many are also taking action to reduce the absolute size of the
sponsor’s pension liability by offering lump sum distributions to participants.
The 38% of plans not pursuing LDI say they are waiting for interest rates to
rise (34%) or are maintaining a total return approach as the plan remains open
In the past six years, plan sponsors using LDI have
materially increased their LDI allocations—36% have an allocation greater than
50% or more today, versus nine percent in 2011, the survey finds.
The firm also discovered that Treasury STRIPs and other
zero-coupon bonds are standing out among LDI strategies gaining popularity.
Forty-five percent of funds that allocate to LDI invest in these products,
versus just 10% in 2012. Long-duration government/credit bonds are the most
popular LDI investment, with 62% of LDI investors using them today versus 46%
“The only lever plan sponsors have to pull is to try and
shrink the size of their liability and many still stand pat,” Smith warns. “If
you look at this issue through the lens of the interest rates story, you’ll see
that those plan sponsors who rejected an LDI approach as they waited for rates
to rise, saw their DB plans suffer. And they’re still waiting for that entry
point as equity markets continue to perform well.”
The NEPC concluded that alternative investment strategies
still remain in favor, with 79% of respondents expecting to maintain their
current allocation to private equity and hedge fund managers, among other
opportunities. The results also show that of those plans invested in
alternatives, 37% allocated between 10-25%, and eight percent allocated between
25-50% of assets.
Other key findings include:
of plan sponsors have a bullish outlook on the stock market for the next 12
months, while 49% are bearish.
changes to liability valuations are the greatest concern followed by low
interest rate and return environment.
- Double-digit equity returns were not enough to stem the negative impact that lower
discount rates had on pension plans.