Administration September 19, 2017

PBGC Premiums Driving DB Plan Sponsors to Fund, De-Risk

“Companies feel that the time is right to reduce or eliminate their pension funding shortfalls.” says Matt McDaniel, partner, Mercer.

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Eighty percent of defined benefit (DB) plan sponsors have accelerated funding, largely due to increasing Pension Benefit Guarantee Corporation (PBGC) fees and the prospect of lower corporate taxes, according to results of the Mercer/ CFO Research 2017 Risk Survey, “Adventures in Pension Risk Management.”

“Two years ago, mortality assumptions dominated as the main influencing factor. Today, PBGC premiums and market conditions have emerged as most cited reasons. Companies feel that the time is right to reduce or eliminate their pension funding shortfalls.” says Matt McDaniel, partner, Mercer. “Continuing the trend we found in our 2015 survey, the migration toward pension risk transfer and de-risking carries on at an accelerated pace.”

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Specifically, respondents say they are now contributing more than the minimum level of funding to their DB plans either because they want to reach specific thresholds or because they aim to fully fund the plan over a shorter period of time than regulations require. PBGC premiums tripled between 2011 and 2016 and are expected to quadruple by 2019—which has had a notable effect on plan sponsors.

When asked about reasons why they either have increased funding or would consider doing so, 40% of respondents decided to increase funding to reduce the cost of future PBGC premiums, and nearly 33% are also considering funding for that same reason. According to Mercer, that combined total of nearly 73% is a notable increase from the 2015 survey results, which found only about 60% citing PBGC premiums as a deciding factor to fund above requirement.

Nearly 60% of survey respondents intend to terminate their plans within the next ten years. Most have a funding deficit they must overcome first. “Sponsors who want to develop a successful pension exit strategy have to make sure they create a process that evaluates and changes the asset allocation, lowering pension risk as frozen plans move closer to termination.” says McDaniel. “DB plan sponsors should weigh considerations such as the plan’s objective, their time horizon, the magnitude of their obligations and the state of the economy.”

De-Risking Accelerates

More than eight in ten respondents say they either have a “dynamic de-risking strategy in place” (42%) or “are currently considering one” (40%), citing a desire to avoid volatility in their financial statements as a main reason. More than half of respondents (55%), however, say they struggle with finding enough internal resources to manage their pension plan. As such, 52% of those surveyed delegate some or all investment execution to a third party through an outsourced chief investment officer (OCIO) model.

Nearly 75% of Mercer’s survey respondents say they have already offered lump-sum payments to certain participants since 2012—up from 59% from the 2015 Mercer CFO survey findings. About 50% of all respondents consider it likely that their companies will take some form of lump-sum, risk-transfer action in the next couple of years—for many of these sponsors, this will be a second or third lump-sum offer.

A significant number of sponsors have implemented an annuity buyout for some pension participants, where an insurer assumes responsibility for the sponsor’s retirement liabilities. Among survey respondents, more than half (55%) have either completed such an annuity buyout or are considering it.

Many companies are held back by the misconception that such annuities are either “expensive” (37%) or “very expensive” (25%). Specifically, these respondents estimate that the cost of an annuity would require their pensions to post a projected benefit obligation (PBO) of more than 110%. However, Mercer’s experience shows the majority of transactions occur between 100% and 110% of PBO.

The full report can be found here. 

The survey collected 175 responses, mostly from CFOs, CEOs and finance directors, with 80% of responses representing DB pension plan assets of between $100 million and $5 billion. More than half (53%) of respondents represent companies with annual revenues of between $500 million and $5 billion. Respondents come from a broad range of industries, with the most sizeable clusters in aerospace/defense and business/professional services.

Deals and People September 19, 2017

Who’s Working for You?: ARA

In a series of articles, PLANSPONSOR is profiling industry groups that work for retirement and health plan sponsors to protect them from onerous burdens and help them with plan design and administration. In this article we profile the American Retirement Association (ARA).

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The American Retirement Association (ARA) was founded in 1966 as the American Society of Pension Actuaries (ASPA).

 

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“While we began as an actuarial organization, we have evolved along with America’s retirement system, and today represent every type of pension professional—from business owners, actuaries, consultants and administrators, to insurance professionals, financial advisers, accountants, attorneys and human resource managers,” says Nevin E. Adams, JD, chief content officer at the ARA in Arlington, Virginia. “While the members of the American Retirement Association come from all corners of the country, representing every part of the industry, they are all united by their belief in, and commitment to, the private pension system. We are, as our tagline states, ‘working for America’s retirement.’”

 

“Empowering retirement professionals to build a stronger workplace retirement system for Americans through information, education and advocacy,” is the ARA’s mission statement.

 

Plan Sponsor Interests

 

According to Adams, ARA’s advocacy efforts are focused on enhancing the private retirement system, and on removing barriers to its success. As examples, he says, this includes things like advocating for electronic disclosures, rather than costly and burdensome paper; encouraging incentives that make it easier for employers, particularly smaller businesses, to offer workplace retirement plans; and working to ensure that undertakings like tax reform don’t undermine the availability or utilization of workplace retirement programs.

 

ARA’s membership of approximately 21,000 is spread across four sister organizations, and they can be members of more than one sister organization. While most are affiliated with a particular association—each has a specific membership focus—several hundred are members of more than one.

 

The association that counts among its members plan sponsors is the American Society of Pension Professionals and Actuaries (ASPPA). According to the ARA’s website, “ASPPA is a non-profit professional organization with two major goals: to educate retirement plan professionals, and to create a framework of public policy that gives every working American the ability to have a comfortable retirement.”

 

ASPPA offers all of its members, including the more than 7,000 who are members of ASPPA, educational opportunities, paired with an advocacy operation that puts it at the center of any legislative debates that could affect what retirement plan professionals do for a living.

 

How ARA Advocates

 

The ARA advocates for its membership via regular meetings with regulators, members of the president’s administration, and legislators. It also provides written comments about proposed regulations and legislation, and offers oral testimony in Congressional hearings.

 

Adams says the most recent regulatory “win” for the ARA was its push to have government regulators—the Pension Benefit Guaranty Corporation (PBGC), the Internal Revenue Service (IRS), the Treasury Department and the Department of Labor (DOL)—ease restrictions on participant loan and hardship withdrawal administration for those impacted by the recent hurricanes, and to provide plan sponsors in those areas with more time to file Form 5500s. 

In addition, he says, “We were one of, if not the first, to press for a change to the fiduciary regulation regarding the extension of fiduciary status via plan sponsor education efforts, and have remained active in the discussions regarding the implementation of the new fiduciary rule.”

 

Most pressing for the ARA right now is tax reform and its potential implications. “This has been front and center in our work with Congress and the Trump Administration over the past several months, both to alert and inform decision-makers about the potential impact, and to help them understand and quantify the impact of various proposals,” Adams says.

 

He notes that, “A little further out, we’ve been actively involved in recent discussions on expanding health savings accounts, or HSAs, including introducing the idea of letting employers offer workers access to the same low-cost investment options already available in their 401(k), 403(b) or 457 plan accounts. This would allow plan sponsors to develop investment advice and education tools to integrate both accounts into an employee’s financial planning so that workers would see streamlined, consolidated statements that show both health and retirement savings.”

 

Resources ARA Provides

 

According to Adams, the ARA offers a wide variety of training and education programs as part of its Retirement Plan Academy. “Our curriculum is carefully expanded and improved each year to address legal, legislative and regulatory changes affecting the pension system and the work of retirement plan professionals,” he says. “Part of that expansion includes employing the latest in online tools and adult learning methodologies, along with a dedicated staff of instructional designers.”

 

He adds that the ARA also provides access to regular, informative webcasts (including the opportunity for continuing education (CE) credit), as well as a series of networking and educational conferences during the course of the year.

 

Members also have access to information about the latest trends, industry news, as well as regulatory analysis and updates via the ARA’s websites, and three sister association-specific emails, in addition to two sister association-specific print publications.

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