Defined Benefit Plan Sponsors Reassessing Long-Term Goals Due to Volatile Markets and Uncertain Costs
June 25 2019 - 9:30AM
Business Wire
Based on the latest Mercer/CFO Research survey:
- More companies are actively de-risking and exploring new
investment governance structures
- Nearly two thirds of those surveyed plan to outsource some
or all of their pension plan investment duties
- 63% of respondents are planning to terminate their plans in
the next five years, up significantly from 38% in 2015
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.”
Mercer and CFO Research will host a webcast to present the 2019
survey results on June 26, 2019 at 12:00 p.m. EDT. Registration for
the webinar can be found here.
About the survey
methodology
CFO Research and Mercer have been conducting this biennial
defined benefit pension risk survey since 2011. As in past years,
this year’s edition drew responses primarily from 155 senior
executives including CFOs, CEOs, and finance directors, all based
in the U.S. and representing a wide range of industries. Just over
half the respondents represent organizations with annual revenue
between $500 million and $5 billion.
About Mercer Mercer delivers advice and
technology-driven solutions that help organizations meet the
health, wealth and career needs of a changing workforce. Mercer’s
more than 23,000 employees are based in 44 countries and the firm
operates in over 130 countries. Mercer is a wholly owned subsidiary
of Marsh & McLennan Companies (NYSE: MMC), the
leading global professional services firm in the areas of risk,
strategy and people. With 75,000 colleagues and annualized revenue
approaching $17 billion through its market-leading companies
including Marsh, Guy Carpenter and
Oliver Wyman, Marsh & McLennan helps clients
navigate an increasingly dynamic and complex environment. For more
information, visit www.mercer.com. Follow Mercer on
Twitter @Mercer.
ABOUT CFO RESEARCH CFO Research, an Argyle company, has
been a trusted source of insight into the business issues that
matter most to finance professionals since its founding in 2000.
CFO Research is the sister firm of CFO Magazine, and relies on
senior finance executives to share their experiences, insights, and
observations on critical business issues. This cutting-edge
research supports critical business decisions by our sponsors, as
well as their thought leadership positioning and marketing
efforts.
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version on businesswire.com: https://www.businesswire.com/news/home/20190625005200/en/
Alayna Francis +44 207 178 3378
Alayna.Francis@mercer.com
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