Last year marked a watershed moment in retirement benefits as numerous companies decreased their pension risk exposure by offering participants a one-time lump-sum pension payout. A new survey by Aon Hewitt reveals more employers plan to follow suit in 2013.
Aon Hewitt surveyed 230 U.S. employers with defined benefit plans, representing nearly five million employees, to determine their current and future retirement benefits strategies. According to the findings, more than one-third (39 per cent) of defined benefit (DB) plan sponsors are somewhat or very likely to offer terminated vested participants and/or retirees a lump-sum pay out during a specified period, also known as a window approach, in 2013. By contrast, just 7 per cent of DB plan sponsors added a lump-sum window for terminated vested participants and/or retirees in 2012.
“There is no question, employers are looking for new ways to aggressively manage their pension volatility,” explained Rob Austin, senior retirement consultant at Aon Hewitt. “In 2012, many DB plan sponsors were exploring options and planning their strategies—we think 2013 will be the year when many more actually implement large-scale actions such as offering lump-sum windows. Pension Benefit Guarantee Corporation (PBGC) premiums will begin to increase in 2013 and 2014, which will increase the carrying cost of pension liabilities and give plan sponsors an economic incentive to transfer those liabilities off their balance sheet.”
Aon Hewitt’s survey also found that most employers (84 per cent) will not make any change to the benefit accruals they offer workers. Of those that are planning changes, fewer than one-in-five (16 per cent) employers are somewhat or very likely to reduce DB pension benefits, while 17 per cent are somewhat or very likely to close plans to new entrants in 2013. Just 10 per cent are somewhat or very likely to freeze benefit accruals for all or some participants.
“Over the past few years, we’ve seen fewer pension plan sponsors closing their plans to new entrants or freezing the benefits for current participants,” said Austin. “However, employers remain under increasing pressure to manage plan volatility and are planning both smaller actions and bolder moves to manage that risk.”
As a first step in their broader de-risking efforts, Aon Hewitt’s survey showed employers are contemplating what different economic scenarios would mean to their plan. Half are likely or somewhat likely to conduct an asset-liability study in 2013, and 60 per cent are somewhat or very likely to have their investments better match the characteristics of the plan’s liability through approaches such as liability-driven investing.
“While the economic environment makes it imperative for DB plan sponsors to manage pension risk in some way, it’s critical that they approach it in a thoughtful manner,” stressed Austin. “The right de-risking strategy for one plan may not be an appropriate approach for another—most importantly, employers need to consider the funded status of their plans. For example, plans that are over funded will likely take measures to lock in this position and erase future volatility through actions such as offering lump-sum windows. An underfunded plan will need to take an approach that attentively addresses volatility such as implementing a glide path investment strategy that will de-risk the plan as the funded position improves.”
Aon Hewitt’s survey found that while just 18 per cent use this glide path strategy today, the percentage is expected to nearly double to more than 30 per cent by the end of 2013. This shift comes as more plan sponsors abandon the traditional approach of investing a majority of plan assets in equities. Aon Hewitt’s survey found that while 52 per cent of plan sponsors favor this majority equity strategy today, just 31 per cent will use this approach by the end of the year.
“Plan sponsors are taking a more holistic view of their pension plan by looking at the overall funded status of the plan and not focusing on the liabilities or assets individually,” explained Austin. “A glide path approach provides an easy link between the two. Additionally, this approach allows plan sponsors to have a long-term strategy in place that will systematically eliminate risk over time.”
