Economic volatility is causing many U.S. plan sponsors to worry about the sustainability of their plans, reports Mercer.
Mercer’s report, Redefining Pension Risk Management in a Volatile Economy, shows that 59% of financial executives surveyed say their company’s DB pension plan poses a risk to their organizations’ financial performance, as equity analysts, investors, credit analysts and rating agencies keep a close eye on the impact of DB plans on company health.
Respondents reported that market volatility and low interest rates have had the greatest impact on the health of their pension plans, followed by higher funding requirements under the Pension Protection Act of 2006, the introduction of mark-to-market balance sheet requirements and expanded disclosure under U.S. and international pension accounting standards.
Of those surveyed, 78% said they have made some form of change in their DB plan’s design, with 47% closing existing plans to new employees, 21% freezing plans for all employees and 13% terminating their plans outright.
Plan sponsors also indicated plans to significantly enhance their risk management strategies over the next few years. Roughly half of sponsors said they are likely to match fixed income duration to their plan liabilities and increase their fixed income allocations. Similar trends also apply to dynamic de-risking, lump sum cash-outs for terminated vested employees and annuity purchase.
“We see plan sponsors positioning themselves for rising interest rates or equity market recovery—either would improve funded status and we expect there will be a significant shift from equities to bonds,” says Nick Davies, principal in Mercer’s investments business. “Corporate defined benefit plan sponsors are intently focused on risk management issues and many are poised to make significant changes. The open questions are: how quickly will market changes occur, and do sponsors have the conviction and capability to carry out their intended changes?”