Five myths that hold back plan sponsors from taking action
NEWARK, N.J., September 18, 2014 – Prudential Retirement, a business unit of Prudential Financial, Inc. (NYSE:PRU), announced today the release of a new white paper, “Reducing Pension Risk: The Five Myths Holding Back Plan Sponsors.” The white paper identifies and explores five myths plan sponsors have about pension de-risking and demonstrates why each is false, providing clarity around the misconceptions.
According to the white paper, the increased interest in pension de-risking among plan sponsors over the years is primarily driven by changes in regulatory and accounting standards, concerns over funded status volatility and increased awareness of longevity risk. For example, in 2012 the market saw an influx of pension risk transfer activity in the U.S., including the General Motors and Verizon transactions.
“Given the rising cost of maintaining defined benefit plans, we know that companies are increasingly interested in managing the risk associated with their plans, with the primary aim of reducing the volatility of funded status and the level of required contributions,” said Rohit Mathur, senior vice president of Global Product and Market Solutions, Prudential Pension & Structured Solutions, at Prudential Retirement.
The spectrum of pension de-risking options is wide, including risk transfer to a third-party insurer through a buy-in, where the insurer makes guaranteed payments to the plan or a buy-out, where the insurer makes guaranteed payments to the plan participants.
The market has continued to grow since the GM and Verizon transactions, and while some plan sponsors are evaluating their de-risking options, a gap clearly exists between the intentions and actions of some companies with respect to DB risk reduction. The white paper cites the following misconceptions, or myths, that are contributing to this gap:
- Partial Liability-driven Investment (LDI) strategies have significantly reduced DB risk;
- Delaying risk management solutions to benefit from further financial market improvements is prudent;
- Risk transfer solutions can only be executed once a DB plan reaches or exceeds full funding;
- Transferring DB risk to an insurer is too expensive; and
- Reducing DB risk, though prudent, reduces shareholder value.
“It’s important for plan sponsors to understand how to frame potential outcomes and evaluate alternatives in a risk management context, while considering correlations with risks that also affect ones core business,” said Scott Kaplan, senior vice president and head of Global Product and Market Solutions for Prudential Pension & Structured Solutions, at Prudential Retirement. “In doing so, more plan sponsors will have a better understanding of the broad range of options available when formulating long-term pension strategies.”
Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or its affiliates.) Insurance products are issued by The Prudential Insurance Company of America (PICA), Newark, NJ, a Prudential Financial company solely responsible for its financial condition and contractual obligations.