June 8, 2012 (PLANSPONSOR.com) – As more employers look to reduce risk from their defined benefit (DB) plans, there are some things they need to know.
There are several options to reduce risk
Speaking at the 2012 PLANSPONSOR National Conference, Tom Toale, AVP of U.S. Pensions at MetLife, said many DB sponsors think they either have to deal with the status quo of funding volatility or freeze or terminate their plans, but there are many options to reduce risk in between those two extremes. He contended pension risk transfer should start with some form of liability-driven investing (LDI). Plan sponsors can extend the duration of their fixed-income investments, change asset allocations to hold more bonds and add principal protection products. When the plan is better funded, sponsors can consider a pension buy-in or buy-out.
You don’t have to give up your relationship with participants Stephen W. Ellis, CFO at Hickory Springs Manufacturing, the first company in the U.S. to complete a pension buy-in (see “Pru Completes Nation’s First Pension Buy-In”), told conference attendees his company wanted to keep its strong relationship with employees and retirees. He explained that a pension buy-in is different from a buy-out in that with a buy-out, the insurer takes on the liability of the pension plan and pays participants and beneficiaries, but with a buy-in, the insurer provides the cash for payments, and the plan sponsor makes the payments. Another difference is that with a buy-in, the plan sponsor can rescind the contract or switch to a buy-out agreement.