Lump Sum Cashouts, Buyouts, Other Derisking Efforts Increase, 2015 Mercer/CFO Publishing Pension Risk Survey Shows
Risk transfer trends
The risk survey found that nearly two thirds (59%) of sponsors surveyed have already offered some type of one-time lump sum payment to vested DB plan participants. This trend seems set to continue, as 49% of survey participants stated their companies are likely to employ some form of lump sum payout in the next two years.
Annuity buyouts may also be on the rise – approximately a third (36%) of this year’s respondents state they are likely or very likely to purchase an annuity in either 2015 or 2016.
“An increase in interest rates could lead to a fast increase in demand for buyouts. Sponsors need to prepare in advance in order to position themselves to move quickly in response to changing market conditions, said Richard McEvoy, Partner, Mercer Investment. “There’s also a misconception about the cost of a buyout – most of the respondents overestimated the costs associated with annuity buyouts. Those assumptions could weigh heavily on action – or lack of – in the buyout market. During 2015, we launched the Mercer Pension Risk Exchange, offering sponsors more transparent pricing and exposing sponsors to a wider array of insurers who could potentially act as transaction counterparties. All of these factors enhance sponsors ability to capitalize on preferred market conditions for a buyout.”
Navigating the changing pension landscape
During 2013, funded status improvement was attributed to rising interest rates and buoyant equity returns. Those gains were short-lived, however, as funded status plummeted from 88% to 79% throughout the following calendar year. Going forward, 70% of sponsors plan to contribute in excess of the minimum required amount. The main reasons influencing DB activity cited by 2015 survey participants included:
“2014 was a game changer for the pension industry with factors like new mortality tables and market volatility causing funded status to decline.” said Matt McDaniel, Partner, Mercer Retirement. “CFOs need to be attuned to an evolving pension market and use the best tools and resources available to develop DB strategies that make the most economic and strategic sense for their organizations.”
Risk reduction as a multi-pronged approach
New York, NY (PRWEB) July 20, 2015
The Mercer/CFO Research 2015 Pension Risk Survey, “Taking the next step in pension risk management: planning to move ahead,” shows that plan sponsors have been spurred to action by a ‘perfect storm’ of pressures on their defined benefit (“DB”) plans. This year’s survey results show that, in the two years since Mercer and CFO Research’s previous survey in 2013, many companies have moved to action in managing risk and mitigating funded status volatility. This year’s research shows a high level of satisfaction among plan sponsors (80%-90%) with various risk management actions they have taken to date. The survey data also demonstrates continuing interest in lump sum cashouts and buyout activity.Risk transfer trends
The risk survey found that nearly two thirds (59%) of sponsors surveyed have already offered some type of one-time lump sum payment to vested DB plan participants. This trend seems set to continue, as 49% of survey participants stated their companies are likely to employ some form of lump sum payout in the next two years.
Annuity buyouts may also be on the rise – approximately a third (36%) of this year’s respondents state they are likely or very likely to purchase an annuity in either 2015 or 2016.
Navigating the changing pension landscape
During 2013, funded status improvement was attributed to rising interest rates and buoyant equity returns. Those gains were short-lived, however, as funded status plummeted from 88% to 79% throughout the following calendar year. Going forward, 70% of sponsors plan to contribute in excess of the minimum required amount. The main reasons influencing DB activity cited by 2015 survey participants included:
- Mortality assumptions: The Society of Actuaries (SOA) updated its mortality assumptions in late 2014, reflecting an increase in longevity. These new tables were cited by survey participants as the leading impetus for sponsors (37%) when considering modifications to pension funding policies and practices in the next two years.
- Funded status: Total funding deficit in 2014 rose and aggregate funding levels sank to 79%, a decline of 9 points from the previous year¹. Funded levels have subsequently improved to an aggregate level of 84% at the end of Q2 2015.
- Pension Benefit Guaranty Corp. (“PBGC”) premiums hike: Though not quite as influential as other factors, 27% of sponsors reported that rising PBGC premiums would affect changes in their funding policies.
“2014 was a game changer for the pension industry with factors like new mortality tables and market volatility causing funded status to decline.” said Matt McDaniel, Partner, Mercer Retirement. “CFOs need to be attuned to an evolving pension market and use the best tools and resources available to develop DB strategies that make the most economic and strategic sense for their organizations.”
Risk reduction as a multi-pronged approach
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