Defined Benefit Plan Sponsors Reassessing Long-Term Goals Due to Volatile Markets and Uncertain Costs

With the benefit of a decade of generally positive market performance, a growing number of plan sponsors report improvements in their funded status, making it more economically feasible for many defined benefit (DB) plans to actively de-risk and rethink their investment governance approaches. That’s a key conclusion of the latest Mercer/CFO Research 2019 Risk Survey, “Pension Management: Creating a Roadmap to Success,” released today.

“Given the challenges of increased market volatility and uncertain costs plan sponsors face today, many are reevaluating how they want to achieve their long-term pension plan goals,” said Matt McDaniel, Partner, US Financial Strategy Group, Mercer. “We are seeing many sponsors take a critical look at their strategic roadmap, including the supporting policy actions and governance structures that will guide them into the future. There was an acceleration of such activity in the past two years, and plan sponsors expect continued evolution in the next few years.”

Among the survey’s key findings:

• Delegating CIO duties is a growing trend: In the 2019 survey, 67% of plan sponsors are operating under a full or partial OCIO (Outsourced Chief Investment Officer) model to improve the governance process and performance of their plans — a notable 15 percentage point increase since 2017.
• Rising PBGC premiums are spurring funding decisions: Pension Benefit Guaranty Corporation (PBGC) premiums have become a primary driver of pension funding strategies for many employers, since improving a plan’s funded level can reduce its PBGC premiums. In the 2019 CFO Research survey, 85% of survey respondents made contributions above minimum requirements to reduce the future cost of PBGC premiums or are considering doing so. This is up from 73% in 2017 and 57% in 2015.
• De-risking strategies are being used to minimize impacts from increasingly volatile markets: The vast majority of plan sponsors (84%) are either employing a dynamic de-risking strategy or are planning to do so, moving this approach into the mainstream. Over half of sponsors surveyed intend to take further steps in this direction, planning to take actions that include: increasing exposure to fixed income, extending duration, and hibernation. Finally, 76% of respondents said it was likely or very likely they will offer a lump sum cash-out option buyout of their pension benefit in 2019 or 2020.
• More sponsors warming to annuity buyouts: A common – but often unsupported – perception is that transferring all or a portion of retiree obligations to an insurer through the purchase of an annuity is an expensive undertaking. However, cost is proving to be less of a barrier, with 70% of survey respondents saying they’re likely to transfer some or all of their retiree obligation from their DB plan through the purchase of an annuity in 2019 or 2020, up from 56% two years ago.
• Plan terminations are on the horizon: Nearly two thirds of sponsors (63%) are planning to terminate their plans in the next five years, up significantly from 38% in 2015. This migration has been driven by the improvement of funded status and interim risk management steps taken to date.
• Fully funded status still elusive: Though 23% of survey respondents reported their plans’ funded status was now 100% or higher, which is up from 13% reported in the Mercer/CFO Research 2017 DB survey, these respondents remain in the minority.

“Sponsors have to manage all their plan risks while remaining in operation,” said Chris Mahoney, US Wealth Leader, Mercer. “Many plan sponsors struggle to find time and expertise internally to fully meet their investment strategy oversight obligations. In light of the rising interest in de-risking, we are seeing a significant jump in the percentage of companies outsourcing, or considering outsourcing, some or all of their investment strategy and execution through a delegated solution.”