De-Risking DB Pensions Moves Into Higher Gear

By Cyril Tuohy

InsuranceNewsNet

Paying out a one-time lump-sum to retirees to trim the risk of defined benefit pension plans – a move known as “de-risking” -- is growing in favor in 2013 as companies look to shrink liabilities.

That’s the conclusion of a survey of 230 U.S. employers by the benefits consulting firm Aon Hewitt. “There’s no question, employers are looking for new ways to aggressively manage their pension volatility,” Rob Austin, senior retirement consultant at Aon Hewitt, said in a statement.

In 2012, Austin said, many defined benefit plan sponsors were exploring options and planning lump-sum payment strategies. This year will be the year when “many more actually implement large-scale actions such as offering lump-sum windows,” Austin said.

Pressure has been building for months. Last April, Ford Motor Co. said it would offer 90,000 U.S. salaried retirees and former employees the option to take their monthly pension benefit as a lump-sum payment. In October, General Motors Co. revealed that it had spent $3.6 billion on pension buyouts for white-collar retirees as part of a plan to cut its global pension liability.

Other big companies have followed suit. They include Sears Holding, NCR Corp., Energy Future Holdings, Archer Daniels Midland, Thomson Reuters, New York Times Co., Visteon Corp., Yum! Brands, Equifax and A.H. Belo, according to a list compiled by one pension and investment publication.

In October, Verizon Communications also announced it would transfer more than $7.5 billion in benefit liabilities to Prudential, a disputed move now making its way through the courts.

Matt Herrmann, leader of the retirement risk management group at Towers Watson, said that under a lump-sum arrangement, employees have options. They can stay in the plan, or they can take the pension asset and invest it themselves.

“There’s a mutual benefit,” said Herrmann, in an interview with InsuranceNewsNet. “It’s only an option for plan sponsors to offer to employees. Employees are not required to take it. The employees can take it and manage it themselves for retirement.”

Towers Watson acted as an advisor to “about two-thirds” of the defined benefit plans that took action last year in offering lump sums, Herrmann said.

The Aon Hewitt survey, “2013 Hot Topics in Retirement,” found that 39 percent of defined benefit plan sponsors were either “very likely” or “somewhat likely” to offer terminated vested participants and retirees a lump-sum payout during a specified period – the so-called window approach.

By contrast, seven percent of defined benefit plan sponsors added a lump-sum window for terminated vested participants and retirees last year.

Moves to de-risk exposures have become more affordable following passage of the Pension Reform Act of 2006, Herrmann said.

The de-risking strategies have also helped companies gain control over pension plan volatility in an era of falling interest rates, which cause estimated payouts to balloon while reducing the earnings of fixed-income portions of a pension's portfolio. Other companies, looking at the low borrowing costs, have taken advantage of the very low rates to borrow large sums which they then contribute to their pensions, Austin said.

While only 23 percent of defined benefits plan respondents were either “very likely,” or “somewhat likely” to gather annuity purchase bids from insurance companies as a method of preparing to deal with lump sum distributions, the survey revealed a potential opportunity for advisors.

More companies are expected to outsource, or co-source the administration of their defined benefit plans in 2013, the survey found. A total of 85 percent said they would be likely to adopt an outsourced or co-sourced approach to plan administration within two years, up five percent from the current approach, the survey found.

Conversely, in-house administration of defined benefit plans, a strategy favored by 20 percent of the survey respondents, will drop by five percentage points in two years, the survey found.

Cyril Tuohy is a writer living in Pennsylvania. He has covered the financial services industry for more than 15 years. He has also written about food, restaurants and travel. He can be reached at Cyril.tuohy@innfeedback.com.

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.