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Thursday, January 30, 2014
by Joe Lustig
volatility of which the upturn is a part could convince plan sponsors to make
moves, such as purchasing group annuity contracts to transfer pension
liabilities or offering lump-sum benefit distributions, practitioners said in
recent interviews with Bloomberg BNA.
regulations on plan terminations could also mean that improved funding levels
are a catalyst for such steps, while increases in pension insurance premiums
might help push the de-risking tide as well, they said.
driving employers to de-risk is not so much their current funded status as it
is the volatility in the funding status from year to year for both accounting
and funding purposes,” Kent A. Mason, partner with Davis & Harman LLP in Washington, said in an
interview Jan. 16.
extent that the Pension Protection Act takes a more market-value approach to
funding and thus caused greater volatility in annual funding, it has no doubt
contributed to employer interest in off-loading their plans,” Norman P. Stein,
professor of law at Drexel University in Philadelphia and senior policy adviser
to the Pension Rights Center in Washington, said in an interview Jan. 9.
funding levels haven't been this high in several years, according to a series
of reports issued in early January.
Watson reported that the funding ratio of the 418 Fortune 1000 companies that
sponsor defined benefit plans was 93 percent at the end of 2013, up from 77
percent the previous year and the highest level since 2007.
Inc. said 2013 was the best year for plan funding improvements in the 13-year
history of its Milliman 100 Pension Index, as the funding ratio hit 95.2
percent at year-end, up from 77.2 percent at the end of 2012.
LLC said that equity market gains combined with interest rate increases wiped
out 81.5 percent of the pension underfunding of defined benefit plans sponsored
by Standard & Poor's 1500 companies in 2013, with the funding ratio hitting
95 percent at the end of the year, up from 74 percent a year earlier.
atmosphere has been ripe for some of the major and more controversial de-risking
strategies. A number of large defined benefit plan sponsors—including General
Motors Co., Ford Motor Co. and Verizon Communications Inc.—have de-risked their
plans in recent years by either purchasing group annuity contracts or offering
lump-sum distributions, or both.
survey conducted in February 2013 by Prudential Financial Inc. and CFO
Research, about 40 percent of the finance executives who participated said that
they would “seriously consider” transferring their plan risk to a third-party
insurer in 2014 or 2015.
improved funding hasn't changed conditions for such de-risking moves. In fact,
in some ways, it might increase the likelihood.
McEvoy, leader of Mercer's financial strategy group, said in Mercer's news
release on its January funding report that the improving funding conditions
could make 2014 a big year for “risk transfer strategies such as annuity
buyouts and voluntary cashouts to former employees, as improving conditions
make these options much more feasible than before.”
Suchsland, a senior retirement consultant for Towers Watson, said in his
company's release on its end-of-year report that the “improved funding
environment will provide pension plan sponsors with some intriguing
opportunities for 2014. We expect the actions we've seen among companies to
de-risk their pension plans over the past several years will accelerate as
funding levels continue to improve, especially in light of increases in PBGC
premiums and mortality tables, and projection scales with increased life
improved funding levels might not be quite all that they seem.
benefit plan must be funded to a certain level to de-risk through an annuity
purchase or lump-sum settlement, Mason said.
most recent reports of improved funding are based on accounting rules, which
use spot interest rates, and not funding level rules, which generally apply an
average of two years' prior interest rates, Mason said.
levels for funding purposes are not as improved” under the funding rules as they
are under the accounting rules, and the levels will fall off even more once the
temporary interest rates stabilization provisions of the Moving Ahead for
Progress in the 21st Century Act (MAP-21) continue phasing out next year, he
Nevertheless, he said, many plans are going ahead with de-risking
because of continued volatility of their funding status, coupled with
increasing PBGC premiums, especially for underfunded plans.
said that the Pension Rights Center continues to generally oppose de-risking
strategies that involve converting the benefit to a lump sum, especially for
retirees, or transferring the liabilities through an insurance company annuity.
employers have to stay in the retirement plan game or come up with new
alternatives,” she said.
to get back to a debate as to why pension plans exist and not make it a debate
detached from retirees' interests about liabilities that must be taken off the
books,” she said.
Drexel University law professor, said that plan sponsors can keep plans at high
funding levels without breaking promises to workers and retirees, for example,
by investing in assets that are safe and not risky. He also said plan sponsors
should lobby Congress to change the funding rules so that funding is evaluated
over a broader period of time rather than as a snapshot.
Excerpted from a story that ran in Pension & Benefits Daily (1/24/2014).
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