DB Lump-Sum Offerings Will Continue in 2013

February 13, 2013 (PLANSPONSOR.com) – More employers plan to decrease their pension risk exposure by offering participants a one-time, lump-sum pension payout in 2013.

Aon Hewitt surveyed 230 U.S. employers with defined benefit (DB) plans, representing nearly five million employees, and found more than one-third (39%) are somewhat or very likely to offer terminated vested participants and/or retirees a lump-sum payout during a specified period in 2013. Just 7% of DB plan sponsors added a lump-sum window for terminated vested participants and/or retirees in 2012.  

As a first step in their broader de-risking efforts, employers are contemplating what different economic scenarios would mean to their plan. Half indicated they are likely or somewhat likely to conduct an asset-liability study in 2013, and 60% are somewhat or very likely to have their investments better match the characteristics of the plan’s liability through approaches such as liability-driven investing (LDI).   

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“There is no question, employers are looking for new ways to aggressively manage their pension volatility,” explained Rob Austin, senior retirement consultant at Aon Hewitt. “In 2012, many DB plan sponsors were exploring options and planning their strategies—we think 2013 will be the year when many more actually implement large-scale actions such as offering lump-sum windows. Pension Benefit Guarantee Corporation [PBGC] premiums will begin to increase in 2013 and 2014, which will increase the carrying cost of pension liabilities and give plan sponsors an economic incentive to transfer those liabilities off their balance sheet.”

Aon Hewitt’s survey found that while just 18% of defined benefit plan sponsors currently use a glide path investing strategy, the percentage is expected to nearly double, to more than 30%, by the end of 2013. This shift comes as more plan sponsors abandon the traditional approach of investing a majority of plan assets in equities. While 52% of plan sponsors favor this majority equity strategy now, just 31% will use this approach by the end of the year.    

“Plan sponsors are taking a more holistic view of their pension plan by looking at the overall funded status of the plan and not focusing on the liabilities or assets individually,” explained Austin. “A glide path approach provides an easy link between the two. Additionally, this approach allows plan sponsors to have a long-term strategy in place that will systematically eliminate risk over time.”  

Most employers (84%) reported they will not make any change to the benefit accruals they offer workers. Of those that are planning changes, fewer than one-in-five (16%) are somewhat or very likely to reduce DB pension benefits, while 17% are somewhat or very likely to close plans to new entrants in 2013. Just 10% are somewhat or very likely to freeze benefit accruals for all or some participants.

Mutual Funds Set to Pass $15T

February 13, 2013 (PLANSPONSOR.com) The U.S. mutual fund industry (open- and closed-end funds, and exchange-traded funds) is set to surpass $15 trillion in assets in February, according to Strategic Insight.

This new industry milestone is achieved by the combination of continued stock market appreciation and renewed investor demand for stock and bond funds. January marked a new record for the fund industry, as monthly net intake for stock and bond mutual funds rocketed to $90 billion (see “Beyond the January Effect”). In addition to these strong inflows, another $30 billion were added to exchange-traded funds (ETFs) during January.  

“Assuming modest economic expansion this year, it is plausible that annual stock and bond fund flows exceed $500 billion, more than 50% above the previous annual record,” said Avi Nachmany, SI’s director of Research.    

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For the first time in a few years, monthly net intake in January was weighted more towards stock and balanced funds than towards bond funds. This trend is likely to persist throughout 2013, barring a major market disruption. Among the $48 billion flowing into equity and balanced funds, more than half went to U.S. equity funds with the balance going into international stock funds.

January set the all-time record for monthly flows into actively-managed stock and bond funds in the amount of $72 billion (or 80% of total mutual fund flows). The previous record for monthly net flows into actively-managed funds was set in January 2007 with $46 billion.   

“Remarkably, January witnessed rapidly expanding demand for a very wide range of investment strategies: U.S. stock and balanced funds; emerging and developed international market stock funds; value and growth strategies; and fixed income, with the exception of U.S. Government bond funds,” added Nachmany. “The two parallel rotations taking place in the fund industry will continue in 2013 and beyond—the rotation towards stock investing and the rotation from cash accounts to bond and income strategies.”   

Exchange-traded products (ETPs), including exchange-traded notes (ETNs), attracted $30 billion of net intake in January. Flows into stock-oriented products accounted for 97% of ETP inflows. International equity ETFs netted $15 billion of inflows during the month, while domestic equity netted $14 billion.  

More about Strategic Insight, an Asset International company, is at www.sionline.com.

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