On the path to de-emphasizing their defined benefit plans, companies are closing their plans, shrinking the pension funding gap, implementing liability-driven investment strategies and transferring risk to third parties, a survey released Wednesday by Prudential found.
CFO Research surveyed senior financial executives in February at over 180 companies in various industries. All respondents offered defined benefit plans with at least $250 million in plan assets.
In transferring risk, many companies are interested in buying annuities for some or all of their obligations; just 6% of firms said they’ve already done so, but nearly 40% said they’re considering it. However, a quarter of respondents said transferring risk to an insurer is too expensive, and 20% said they’re waiting for more choices to become available before they make a decision.
“These financial executives are worried about management attention being diverted from running the business to dealing with pension liabilities,” Margaret McDonald, senior VP and actuary for pension risk transfer at Prudential Retirement, said in a statement. “An increasing number are looking at transferring the entire pension risk.”
As for other benefits for employees, respondents said that finding cost-effective solutions to keep employees happy is especially important, as 71% said controlling the cost of healthcare benefits is their top benefits priority over the next year. About a third said minimizing the impact of those costs on employees was a top priority. Just 28% said reducing the costs of other benefits or increasing satisfaction overall was a top priority, even though about 90% of respondents said employees’ benefit satisfaction was important to the company’s success.
About 62% of respondents said they have or are likely to offer DB plan participants a lump sum to close the plan, but more than 40% of executives surveyed said such a move is inconsistent with a benefit policy where the goal is to provide adequate income. To that end, companies that are eschewing DB plans are turning to defined contribution plans as an alternative. However, almost two-quarters think “a significant portion” of their participants will have to delay retirement, so many companies are looking for ways to enhance their DC plans.
For example, although target-date funds are popular among investors, 60% of respondents think they need to protect against volatility better, and 63% said they should include an option for guaranteed lifetime income.