Plan Sponsors Express Interest in Pension Risk Transfer Products

Managing financial liability of pension plans

WINDSOR, Conn., June 9, 2014—Eight in ten employers who offer a defined benefit (DB) plan expressed interest in pension risk transfer products, according to a new survey by LIMRA Secure Retirement Institute.

Of the nearly 400 DB plan sponsors surveyed, one in five were unfamiliar with pension risk transfer products and another 50 percent were only somewhat familiar with pension risk transfer products. Not surprisingly, plan sponsors more familiar with the products were more interested in them, as were plan sponsors with frozen DB plans.

“Managing the financial liability around a company’s pension plan is one the most challenging responsibilities for a company,” said Alison Salka, senior vice president and director of the LIMRA Secure Retirement Institute. “It is critical that the decision-makers at these companies understand all of the financial options to manage their pension liability to make an informed decision that serves the unique needs of their company.”

The study found that half of the traditional DB plans were still open to new participants; while 36 percent of plans were partially frozen and another 14 percent were fully frozen. The study found that plans with more than $250 million in assets were more likely to be open to new participants than smaller plans (69 percent vs. 47 percent). LIMRA Secure Retirement Institute research revealed that only six percent of plan sponsors said they planned to freeze their DB plan within the next two years.

The majority of plans sponsors surveyed (55 percent) use a liability driven investment strategy (LDI) to mitigate the financial risk of their DB plan

The majority of plans sponsors surveyed (55 percent) use a liability driven investment strategy (LDI) to mitigate the financial risk of their DB plan. Other employers said they considered or implemented risk settlement options like lump-sum payouts and group annuity buyouts.

Number one reason: Lack of knowledge

The top reason for sponsors who are not very or not at all interested in pension risk transfer is lack of knowledge. Other reasons given by plan sponsors for not considering a pension risk transfer product include: using another method to address the risk, purchasing costs of annuities, and potential negative perceptions by stockholders (chart).

“There is a misconception that the cost of transferring the risk through an annuity would be prohibitive but recent analysis by Mercer found that it was slightly cheaper for a plan sponsor to purchase a buyout for the retiree portion of its plan than it was to keep it in-house1,” noted Salka. “We expect the growing impact of DB plans on balance sheets is going to drive more CFOs and others in finance to learn about and consider pension risk transfers in the future.”





1 Mercer US Pension Buyout Index, 2014
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