North American retirement plan sponsors are increasingly seeking to reduce or remove the innate risks in their defined benefit pension plans, according to a recent report.
“There’s no doubt that pension de-risking has become a major focus for corporate plan sponsors,” according to a report from Prudential and Fidelity titled Pension Plan De-Risking, North America. “Average fixed income allocations are around 40%, up from 25% 5 years ago. With a $3 trillion corporate pension market and an average allocation expected to reach 70% to 80% over the next 5 to 10 years, we anticipate around $1 trillion of money movements. Even a conservative estimate of $500 billion would represent a sizable shift.”
The report, which was carried out by independent publisher Clear Path Analysis, surveyed 123 U.S. pension professionals to better comprehend their outlook on pension de-risking in the current economic landscape.
According to the survey, more than half were either very likely or considering transferring their risk to a third-party insurer or implementing a lump sum program for defined benefit participants.
The next 12 months could see a greater wave of corporations looking to transfer risk as a result, according to Alexandra Hyten, vice president of pension risk transfer at Prudential Retirement.
“With the variable [Pension Benefit Guaranty Corp.] premium going up to 4.1% of [a] pension’s schemes unfunded liability and with interest rates being as low as they are, many plans are at least considering borrowing,” Hyten states in the report. “They feel they need to fund-up their plan to eliminate that portion, so many corporations are at that trigger point right now.”
According to Hyten, one of the main drivers for the increase in de-risking activity is that the total cost to maintain a pension plan has increased.
This is largely due to an increase in premiums paid to the PBGC. The fixed per person premium is $64 in 2016, but the new bill will increase the fixed premium to $80 in 2019.
“To put this into perspective, the fixed premium was $35 as recently as 2012 and $19 as recently as 2005, just 10 years ago,” according to Hyten.
The variable premium, which is the amount paid per $1,000 of unfunded liability, will also increase from the already scheduled $30 in 2016 to $41 by 2019. According to Hyten, this premium was $9 as recently as 2013 and did not exist prior to 1998.
The Bipartisan Budget Act of 2015, passed in November, is the third bill in four years to increase the PBGC premiums.