Market Strong for Plan Sponsors to De-Risk DB Plans, According to Agilis

Actuarial consultant and investment specialist Agilis Partners LLC expects a substantial increase in defined benefit plan terminations of frozen plans in 2024.

The firm’s DB market analysts pointed to the effect of volatile discount rates, used to value the cost of future pension obligations, as a reason for plan sponsors to take advantage of positive funding status to de-risk their plans. While discount rates fell “sharply” in the latter two months of the year, strong markets generally left pension plans better funded at the end of 2023 than one year prior, according to Michael Clark, managing director at Agilis.

“All plan sponsors should be considering risk transfer strategies like lump sum cash-out windows or annuity buyouts,” Clark says by email.

“The lump sum opportunities are a function of the interest rate basis used to calculate the lump sum present values, which for many plans will be based on high quality corporate bond yield rates from September and October 2023,” Clark adds. “Given that those were much higher than where yields are at today, there may be an economic advantage to settling pension liabilities via lump sum payments in 2024 when the amount paid out is less than the liability released from their books. If interest rates stay steady or decline in 2024 this will continue to be an attractive de-risking opportunity.

Agilis, which provides pension de-risking services, made the following arguments for plan sponsors to take de-risking actions in 2024:

• Lump sum payout campaigns should be economically attractive for most plan sponsors when considering certain active employees and in-pay retirees;
• Pension risk transfers via annuity buy-outs will continue to be attractive, in part due to the strength of annuity payouts on higher interest rates;
• With the prospect of lower interest rates, now is a good time to explore investment-related solutions to protect funded status gains achieved in 2023; and
• Sponsors with frozen defined benefit plans will want to give serious consideration to potential plan termination.

“Plan terminations and retiree carveouts continue to remain attractive,” Tom Cassara, CEO of Agilis, stated in a press release “First quarter annuity purchases are already looking strong, and additional insurers are considering entering the pension risk transfer market. This would increase competition, open up capacity, and drive attractive pricing for plan sponsors looking to derisk their pension plans in the future.”

Agilis provides actuarial and investment consulting focused on options that incorporate outsourced CIO actuarial and investment consulting; derivatives management; specialty investment management strategies; pension administration services; annuity buyouts and plan terminations; and pooled employer 401(k) consulting.