Pension plan funding fell into a dark hole during the recession, yet once the economy rebounded, so did funding levels of most corporate plans.
Time to celebrate, kick back in a sunny place, trust that the market will just get better and better?
Hardly, say the retirement experts at Mercer.
Rather, they say, savvy plan sponsors will see the present convergence of positive trends as a good time to take action to protect their assets from the next plunge.
Referring to the bleakest days of the Great Recession, Mercer noted that the deficits those years “caused many plan sponsors to defer action on pension risk management strategies — as well as required plan funding — as they waited for rising interest rates and recovering equity markets to bring plans back onto solid ground.”
Plan sponsors began to see light at the end of the tunnel last year, as double-digit equity returns and rising interest rates resulted in significant improvements in the funded status for most pension plans. Mercer estimates that as of Dec. 31, 2013, the aggregate funded status of defined benefit plans sponsored by companies in the S&P 1500 was at nearly 95 percent, with 31 percent of plans more than 100-percent funded.
And so today’s “environment offers plan sponsors an opportunity to explore risk management strategies, though, as Mercer points out, it’s an opportunity that may be short-lived as companies face new uncertainties. The questions to pose, it says, include:
- How would changing interest rates or a moderate-to-severe market correction affect assets and liabilities?
- Will Congress look to further increase the Pension Benefit Guaranty Corp.’s premiums, on top of the significant increases incorporated into MAP-21 legislation in 2012 and the budget deal signed in late 2013?
- To what extent will new statutory mortality tables increase participant lump sums, and how will these increases affect plan funding and the bottom line?
- Are plan sponsors prepared for the complex legal, administrative and compliance issues in this new environment?
Mercer’s point, of course, is to act now, while you can.
Along those lines, the firm published a white paper offering its thinking on three areas of greatest concern to plan sponsors: glide path strategies, cashing out and retiree buyouts.
Here’s what it had to say about each:
1. Glide path strategies
The glide path, of course, remains the favored approach to managing balance-sheet volatility but there’s plenty to consider:
THE MYTH OF THE PERFECT HEDGE. The perfect hedge does not exist to balance obligations and the associated assets. “‘Set it and forget it’ hedging strategies are generally not going to result in optimal outcomes for the plan sponsor,” Mercer says, cautioning that volatile market conditions and other uncertainties argue against the passive approach.
THE NEW FRONTIER OF GLIDE-PATH TRIGGERS. The typical glide path strategy relies upon triggers tied to funded status. Mercer likes better the trend it’s seen with companies that pursue “a two-pronged approach for which funded status remains a primary driver but that also incorporates interest-rate triggers.” Benefits include locking in favorable interest-rate increases.