2013 was a great year for defined benefit (DB) plans. A recent report by Mercer said that pension plans of the S&P 1500 companies are now 95% funded, up from 74% a year ago. Fueled by record high stock market levels, strong contributions by plan sponsors and modest increases in interest rates, sponsors of defined benefit plans are finding themselves in a much better position when looking at the funding of their DB plan.
While that’s great news for DB plans, it’s important that plan sponsors don’t become complacent. It wasn’t long ago that funding levels dipped to historic lows.
My recommendation to plan sponsors of DB plans right now? Be an elephant! Don’t forget about the risks a DB plan can have on your organization.
One of the biggest risks facing DB plan sponsors right now is complacency over managing their pension risk. There are several strategies a plan sponsor can use to manage risk in their DB plan. Some I’ve discussed in prior posts:
- Plan Design Changes, including a soft or hard freeze
- Liability Driven Investing
- Dynamic Asset Allocation
- Risk Transfer (buy in or buy out)
Manage DB Plan Risk in 2014
Many plan sponsors I meet with immediately jump to the risk transfer discussion (buy-in or buy-out) when de-risking comes up. However, de-risking a DB plan is not an all-or-nothing proposition. There are many strategies that can be taken to stabilize a plan’s funded status and reduce the risk and volatility of a DB plan without incurring the cost of a final risk transfer.
Plan sponsors can also take steps to remove risk from the table incrementally. For example, Liability Driven Investing (LDI), which is the matching of a plan’s duration of assets and liabilities, doesn’t result in an annuity purchase or cash-out like risk transfer strategies. Also, a lump sum payout is another de-risking strategy that typically only targets participants who have already terminated employment.
Although 2013 was a good year for many pension plans, the same risks remain. Managing the risk and volatility of a DB plan should be on every DB plan sponsors’ to-do list for 2014.
In addition to blogging here, I also tweet regularly about DB topics of interest. Click to follow me on Twitter- @scottruba.
The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.
 http://www.mercer.com/press-releases/US-pension-funding, January 2013