Nearly Half of Corporate Pensions Considering Lump-Sum Payouts
While a majority of
plan sponsors are hedging interest rate exposure using LDI strategies, many are
also turning to lump-sum distributions to reduce the absolute size of pension
liability, a survey found.
By Javier Simon
December 01, 2016 - PLANSPONSOR
Following U.S. lawmakersf move to increase the variable rate premiums charged
by the Pension Benefit Guaranty Corporation (PBGC), nearly half of Americafs
pension plans are considering lump-sum payouts.
This is according to the 2016 Defined Benefit Plan Trends Survey by
investment consulting firm NEPC.
For those plan sponsors considering other risk reduction measures, 27% said
they plan to issue annuities. Twenty-five percent are considering higher
contributions. Thirty-nine percent of respondents werenft planning any changes
at the time the survey was taken.
gThe real game changer was what occurred at the end of last year with the
PBGC rate premium decision, and plan sponsors have been scrambling on what to do
ever since,h observes Brad Smith, partner in NEPCfs Corporate Practice.
gOur expectation is that this anxiety about the rate premiums will continue,
regardless of who is in the White House. We continue to advise clients on best
approaches to improve or maintain their funded status in a low-yield
environment, even with a slight rate increase expected before the end of the
year.h
As projected, longevity
increases are affecting pension funding. In 2016, the number of
defined benefit plans with a funded status less than 80% increased to 28%, from
21% in 2015. Forty-three percent of plans have a funded status of at least
90%.
Thirty-four percent of respondents considered issuing debt to improve
funded status; 47% of these plans have a funded status of less than
80%.
The firm also points out that while a majority of plan sponsors (69%) are
hedging interest rate exposure using liability driven investing (LDI)
strategies, many are also taking action to reduce the absolute size of the
sponsorfs pension liability by offering lump sum distributions to participants.
The 38% of plans not pursuing LDI say they are waiting for interest rates to
rise (34%) or are maintaining a total return approach as the plan remains open
(29%).
In the past six years, plan sponsors using LDI have materially increased
their LDI allocations—36% have an allocation greater than 50% or more today,
versus nine percent in 2011, the survey finds.
The firm also discovered that Treasury STRIPs and other zero-coupon bonds are
standing out among LDI strategies gaining popularity. Forty-five percent of
funds that allocate to LDI invest in these products, versus just 10% in 2012.
Long-duration government/credit bonds are the most popular LDI investment, with
62% of LDI investors using them today versus 46% in 2012.
gThe only lever plan sponsors have to pull is to try and shrink the size of
their liability and many still stand pat,h Smith warns. gIf you look at this
issue through the lens of the interest rates story, youfll see that those plan
sponsors who rejected an LDI approach as they waited for rates to rise, saw
their DB plans suffer. And theyfre still waiting for that entry point as equity
markets continue to perform well.h
The NEPC concluded that alternative investment strategies still remain in
favor, with 79% of respondents expecting to maintain their current allocation to
private equity and hedge fund managers, among other opportunities. The results
also show that of those plans invested in alternatives, 37% allocated between
10-25%, and eight percent allocated between 25-50% of assets.
Other key findings include:
- 51% of plan sponsors have a bullish outlook on the stock market for the
next 12 months, while 49% are bearish.
- Legislative/actuarial changes to liability valuations are the greatest
concern followed by low interest rate and return environment.
- Double-digit equity returns were not enough to stem the negative impact
that lower discount rates had on pension plans.