The FINANCIAL — Plan sponsors’ executives are taking decisive action to reduce exposure to pension financial risk, according to a survey of 177 financial officers conducted by CFO Research in conjunction with Mercer.
Many large companies are reorienting their DB plans to outcome-based strategies ensuring steady, if not spectacular progress in improving their funded status and better protecting their plans from the uncertainty of market swings, according to Mercer.
About half the companies represented in the survey (49%) are currently matching the duration of fixed-income investments to DB plan liabilities and 43% are employing dynamic de-risking which shifts assets into lower-risk categories as the company’s funded ratio improves.
“Overall, we see plan sponsors moving toward ‘outcome-based’ objectives, with a clear road map for getting from their current state to a desired level of risk over the next several years,” said Jonathan Barry, Mercer’s US Retirement DB Risk Leader. “They are adopting a more holistic approach to risk management which integrates plan design, risk transfer and investment management strategies,” he added.
“As funded ratios improve, additional de-risking becomes both more attractive and more feasible,” Mr. Barry noted. “At the end of May, 2013, pension funding levels for the S&P 1500 stood at 86%, the highest level in nearly two years. This compares to an estimated 74% at December 31, 2012, and the record low of 70% at the end of July, 20121. This improvement dovetails nicely with feedback we are getting from clients who have implemented a glide path strategy. They are reaping the rewards of this rapid improvement,” he added.
“This also highlights the benefit of having a nimble execution process in place ahead of time to capitalize on market changes as they arise,” said Richard McEvoy, a Partner in Mercer’s Investment business. “Mercer has executed over 100 dynamic de-risking triggers on behalf of clients since the financial crisis, with a significant uptick in activity as funding levels have improved,” he added.
Some 69% of the respondents to the CFO Research survey said that they are somewhat or very likely to offer lump-sum distributions to current employees at some point in the future, while 67% said they are somewhat or very likely to offer lump sums to former employees who are yet to retire, according to Mercer.
Nearly half of respondents (48%) said their companies were very likely or somewhat likely to purchase annuities or transfer liabilities to a third party in the next two years. A similar number (45%) of respondents said the pension risk transfer transactions of such large companies as GM and Verizon had made this option seem more viable.
A significant number of survey respondents (37%) cited current low interest rates as a current disincentive, with only 14% of respondents anticipating meaningful increases in interest rates over the next 12 months, according to Mercer.
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