As a defined benefit (DB) plan sponsor, you’ve probably had at least one discussion on the merits of de-risking your pension plan. Over the past year, I’ve frequently blogged about the different methods used to manage a DB plan’s risk. But due to several high-profile de-risking transactions made by companies like GM, Ford and Verizon, the de-risking method of transferring pension liabilities to an insurance company (also known as a “buy- out”) is getting more attention.
Posts from the ‘Defined Benefit’ Category
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.
My last post discussed step two in the defined benefit (DB) plan termination process. Now it’s time to look at the final step of a hard-frozen DB plan termination—the final risk transfer.
This involves paying out plan benefits to participants in order to satisfy the liabilities associated with the pension plan. Generally, there are two methods a plan sponsor can use: Read more
While most would agree it is good to see progress towards a budget bill (The Ryan-Murray Bipartisan Budget Act) that will avoid another government shutdown, reduce the deficit and relieve some of the sequestration spending cuts, there is always a flip side to every coin. For single employer defined benefit (DB) plan sponsors, the flip side is the bill also includes the second significant increase in two years to Pension Benefit Guaranty Corporation (PBGC) premiums. Read more
No crystal ball? No problem. It may be possible to reach DB plan objectives regardless of interest rates.
Stop waiting on interest rates to manage DB risk and volatility!
A recent paper published by Principal Financial Group® says it can be possible. (PDF: 694 KB)
It’s a common belief that interest rates have nowhere to go but up. And because bond investments typically go down in value when interest rates go up, plan sponsors may be avoiding investments in bonds in favor of other options. As the duration – that is, the length of the maturity of the bond – extends longer, the larger the decline in the bond investment will likely be if interest rates increase. So plan sponsors that invest in bonds have generally been sticking to shorter duration bond investments.
If a plan sponsor feels interest rates will go up, should they avoid bonds – and in particular longer duration investments? According to this article, that is not necessarily the case. Read more