Benefits December 16, 2013

Retirement Readiness May Be Better Than Thought

December 16, 2013 (PLANSPONSOR.com) – The amount employees have saved for retirement may be higher than the retirement plan industry thinks, according to an analysis from Towers Watson.
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The consulting firm’s analysis, “Retirement Savings: How Much Do Workers Really Have?,” looks at estimates of employees’ retirement savings and benefits, not only from the retirement plan of their current employer but also from other sources. Some of the other sources of retirement savings include individual retirement accounts, pensions from previous jobs (from the employee, or their spouse or partner), pensions belonging to a spouse or partner, and pensions belonging to former spouses or family members to which they have some right. The analysis does not factor in Social Security benefits.

The analysis finds retirement savings vary. The median accumulation is $79,300 and the average is $187,100. About 70% of workers have a defined contribution (DC) plan at their current job and about 33% have a defined benefit (DB) plan.

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For most workers surveyed, retirement plans sponsored by their current employer are their primary savings vehicles for retirement. However, the data indicates that other sources of pensions and benefits are substantial, so omitting them underestimates the savings preparedness of 45% of workers.

The percentage of workers with outside savings is 56% among those ages 51 through 60, this compared with 34% among those ages 30 to 40. According the analysis, this difference is probably due to the fact that older workers have likely had multiple jobs over their lifetime. The median amount of such savings is also bigger among older workers—$49,000 for the older group versus $30,000 for the younger group.

The analysis concludes that many workers have “substantial savings outside of their current employer’s plans, which suggests that workers’ retirement prospects might be brighter than it appears from their current-job savings.”

The data comes from a survey of consumer finances done by the Federal Reserve Board in 2010. Details compiled include employee income, savings, benefits, investments and demographic characters. Respondents are between 30 and 60 years old, and work for companies with more than 100 employees. More information about the analysis can be found here.

Administration December 16, 2013

Pension Buyout Costs Tick Up

December 16, 2013 (PLANSPONSOR.com) – The cost of purchasing pension annuities from insurers increased to 108.4% of liabilities during November.
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This is up 10 basis points from the 2013 low observed at the end of October. The long-term economic cost of maintaining pension liabilities remained level at 108.2% of balance sheet liability, according to the Mercer U.S. Pension Buyout Index.

The index tracks the relationship between the accounting liability for retirees of a hypothetical defined benefit (DB) plan and two cost measures. These include the estimated cost of transferring the pension liabilities to an insurance company (i.e. the cost of executing a buyout) and the approximate total economic cost of retaining the obligations on the balance sheet.

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Low margins between buyout costs and the economic cost of retaining liabilities are potentially attractive for sponsors considering pension risk transfer (PRT) activities, according to commentary from Mercer issued with the November numbers.

The commentary suggests a significant rise in interest rates during 2013 has led to a decrease in the absolute cost of a buyout. During November, interest rates increased and the market saw positive equity performance.

As such, the aggregate funded status of pension plans sponsored by companies in the S&P 1500 stands at an estimated 93% as of November 30, up from 74% at the end of 2012. For many plans, this rise in funding levels has reduced the potential cash and funded status impact of a buyout, according to Mercer’s analysis.

Sponsors considering a buyout in the future should review their plan’s investment strategy and consider increasing allocations to liability-hedging assets, according to Mercer’s commentary. This can reduce the likelihood of a company experiencing future declines in funding status or unexpected cash requirements during annuity purchases.

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