Pensions Make More De-Risking Moves

January 29, 2014 ( - In an effort to decrease pension risk exposure and insulate plans from fluctuating economic conditions, more defined benefit (DB) plan sponsors are realigning their plan assets to match plan liabilities.

According to Aon Hewitt’s survey of more than 220 U.S. companies with DB plans representing 5.8 million workers, 62% of pension plan sponsors are somewhat or very likely to adjust their plan’s investments to better match the liabilities in the year ahead, compared to just one-in-six that do so today. Some companies plan to go one step further and adopt dynamic investment policies or glide paths that increase exposure to fixed income and risk-hedging options as their plan’s funded status improves. Twenty-two percent of employers currently have a glide path strategy in place. By the end of 2014, 30% of companies are expected to have embraced this approach.

The survey also found companies are adopting a more thorough approach to monitoring and managing pension risk by focusing on three key areas:

  • Understanding potential risk. Nearly one-quarter (24%) of pension plan sponsors have  recently conducted an asset liability study to get a better picture of their plan’s performance under varying economic conditions—double the number of companies that had done so in 2012. Of the companies that had not yet conducted a study, 45% are somewhat or very likely to do so in the next 12 months.
  • Monitoring funded status. One-in-eight employers have already established a method to monitor daily funded status of its plan—twice the number of employers than in 2012. One-quarter of the plan sponsors that do not have this monitoring in place are somewhat or very likely to do so in 2014.
  • Reducing liabilities. Pension plan sponsors continue to adopt strategies to limit their liabilities. Lump-sum settlements through a “window” are becoming increasingly popular. Twelve percent of plan sponsors recently introduced or expanded the availability of lump-sum windows for retirees or terminated vested participants, and 43% are somewhat or very likely to complete a lump-sum window for inactive participants during 2014.

“Employers used to only evaluate their plan’s funded status once each year when they were required to report on the plan’s performance,” explains Rob Austin, director of retirement research at Aon Hewitt. “Now they understand that it is critical to have a real-time view of how market and economic conditions are impacting the plan to enable them to adjust and execute their investment strategy at a moment’s notice.”

“As PBGC premiums have increased, the fixed costs of maintaining a qualified pension plan have also increased, making it more desirable for plan sponsors to settle plan liabilities through lump-sum payouts,” adds Ari Jacobs, global retirement solutions leader at Aon Hewitt. “These settlements allow companies to reduce their pension obligations while at the same time, give workers access to their retirement funds much earlier than planned.”

The Aon Hewitt survey report may be downloaded from here.

For more on important considerations in DB plan de-risking, see “Some Glide Path Can Trigger Bad Bond Buying.”