Administration August 16, 2017

Cost Concerns Driving Pension Risk Transfer Decisions

Even the plan sponsors that have not implemented a pension risk transfer say costs from changing mortality assumptions and rising PBGC premiums would make them more likely to do so.

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A study confirms that cost is the main factor driving corporations to implement a pension risk transfer by purchasing an annuity from an insurance company.

One-third of respondent to a survey conducted by CFO Research in cooperation with Prudential Financial chose each of the following factors: Desire to manage the total costs of the organization’s pension plan; desire to mitigate the impact of changing actuarial mortality assumptions, including potential future changes; and desire to mitigate the impact of rising Pension Benefit Guaranty Corporation (PBGC) premiums, including potential future increases.

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“Desire to reduce the pension plan’s asset-related volatility” was chosen by 31% of respondents, while “desire to focus the organization on its core business (rather than on pension issues)” and “desire to reduce the number of smaller-benefit payments being made” were each chosen by 25% of respondents.

Seventy-two percent of organizations that have already shifted some defined benefit (DB) plan liability to an insurer via a group annuity purchase indicated they were likely to shift additional liabilities in the future.

Eighty-five percent believe their decision to engage in a pension risk transfer helps them keep their benefits promise to employees and offers employees greater retirement security in the long run. Eighty one percent either agreed or strongly agreed to the statement, “I believe that my organization’s pension beneficiaries who have been affected by a group annuity purchase are content to receive their pension payments from an insurance company.”

Among those who have not completed a pension risk transfer, only 20% said it is likely they will do so in the next two years. However, 28% say the increase in interest rates from a year ago (and the prospect of further increases) make it much more likely to implement a pension risk transfer, while 35% said the same about the recent rise in PBGC premiums (and the prospect of further increases) and 33% said the same about the recent change in actuarial mortality assumptions (and the prospect of further changes).

The study also shows how tax and regulatory proposals from the current administration and Congress could serve as additional motivators for considering such a move. Among respondents who have not yet completed a group annuity purchase, 55% agreed that lowering the corporate tax rate in 2017 would “very likely” motivate their companies to increase pension plan funding—often a precursor to purchasing a group annuity, according to Prudential—in the next year, while 40% agreed that lower taxes would lead them to execute a full or partial pension liability transfer.

Full results of the survey of 80 senior finance executives at companies with traditional pensions can be viewed here.

Data and Research August 16, 2017

Taxpayers Not Burdened by Public Pensions

According to a study by NCPERS, public pensions are generally cost-effective and pump trillions of dollars into local economies.

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Taxpayers only contribute about 20 cents on the dollar toward public pension plan contributions, according to a recent paper by the National Conference on Public Employee Retirement System (NCPERS). 

The organization also cites research by the National Institute on Retirement Security (NIRS) indicating that every dollar paid in pension benefits creates $2.21 in economic output. This results in about $3.7 trillion of pension fund assets invested in the U.S. economy by public pension funds, NCPERS suggests.

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Research by the National Institute on Retirement Security (NIRS) points out that economic activity generated by the spending of retiree pension checks in 2014 resulted in $189.7 billion in tax revenues. At the same time, $120.5 billion was contributed toward pension systems in taxpayer contributions to state and local pension funds that year.

NCEPERS says, “Opponents of public pension often argue that taxpayers cannot bear the heavy burden of funding public pensions. The fact is quite the opposite. When public programs are funded on a pay-as-you-go basis, taxpayers put up every dollar for the services they receive. But public pensions are funded in advance, over the course of many years, with investment earnings and employee contributions powering asset growth.”

According to the organization’s study of California Public Employees Retirement System (CalPERS) and California Teachers Retirement System (CalSTRS), their investments support 1.45 million jobs. It notes that if the 2016 average salary in California is about $90,000 and 2016 average tax rate is about 17%, CalPERS’ and CalSTRS’ investments in California will generate $22.2 billion in state and local revenues.

However, NCEPERS notes the often bleak state of pension funding. It maintains that if “governments continue to dismantle public pensions, they will inflict $3 trillion in damage on our economy by 2025. In short, while public pensions are cost effective and beneficial, dismantling pensions is costly and short-sighted for taxpayers.”

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