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Portfolio > Alternative Investments > Private Equity

SOA Study: Private Pension Costs are on the Rise

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Sponsors of private, single-employer defined benefit pension plans are facing increasing funding requirements due to a combination of interest rate and equity market conditions, according to a new report.

The Society of Actuaries, Schaumburg, Ill., published this finding in a new report, “The Rising Tide of Pension Contributions Post-2008: How Much and When?” The report uses data from the regulatory filings of the private sector defined benefit pension system and the Pension Insurance Modeling System, originally developed for the Pension Benefit Guaranty Corp., to analyze the private, single-employer defined benefit system.

The research shows that aggregate contribution levels are sensitive to the effects of stock market returns due to significant exposure to equity investments in the system.

According to the report, employers contributed an average of $70 billion per year over the five years ending in 2009. Required contributions are expected to average $90 billion per year between 2010 and 2020, reaching a peak level of $140 billion in 2016.

While challenges remain for many plan sponsors, system-wide these challenges should not be considered insurmountable, says Joseph Silvestri, FSA, retirement research actuary with the SOA and lead researcher of the report.

“The data shows that employers, on average, have been contributing well in excess of the minimum requirements for the last several years,” Silvestri says. “While the system as a whole is successfully navigating the rising tide of minimum required contributions, there will be individual employers for whom the pension plan funding requirements pose a greater short-term challenge.” 

Silvestri says defined benefit sponsors may consider revising funding choices to sustain their pension plans. Potential strategies include adopting a contribution policy that “smoothes” pension contributions regardless of market performance. For those that carry equity risk, strategies may include adjusting asset portfolios to reduce the effects of market volatility and declining interest rates.

Options could also include linking minimum required contributions to the sponsor’s equity portfolio risk, credit rating, plan maturity or a contribution thereof, and changing minimum funding requirements to make them less sensitive to interest rates and equity market fluctuations.


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