In the U.S. corporate pensions market, there is broad consensus that the risk position of corporate pension plans is not sustainable, yet U.S. plan sponsors lack awareness of the impact of improved life expectancy on their pension liabilities, and focus almost exclusively on investment risk, the paper says.
Unprecedented pension deficits are front-and-center and the cash required to close them is straining free cash flow. Having endured significant market downturns over the past several years, sponsors are now keenly aware of how volatile that cash call can be. Transferring pension risk through an insurance solution offers a sponsor the opportunity to remove these risks from their balance sheet and focus on their core business.
The paper notes that longevity challenges are not limited to corporations that sponsor defined benefit plans. As members of the Baby Boomer generation approach retirement, their ability to retire with security is also becoming the focus of corporations that sponsor defined contribution plans as the main source of retirement benefits. When uncertainty about the ability to make account balances last throughout retirement causes these older employees to postpone retiring, the normal course of promotion and hiring that keeps a corporate culture vibrant and motivated is disrupted. Lifetime income solutions can provide needed security to this generation of workers and support workforce management strategies. The report, “Longevity Risk and Insurance Solutions for U.S. Corporate Pension Plans,” can be downloaded from http://research.prudential.com/view/page/rp/313.