Lump Sum Cashouts, Buyouts, Other Derisking
Efforts Increase, Mercer CFO Risk Survey Shows
The Mercer/ CFO Research 2015 Risk Survey, “Taking the next step
in pension risk management: planning to move ahead,” shows that
plan sponsors have been spurred to action by a ‘perfect storm’ of
pressures on their defined benefit (“DB”) plans. This year’s survey
results show that, in the two years since Mercer and CFO Research’s
previous survey in 2013, many companies have moved to action in
managing risk and mitigating funded status volatility. This year’s
research shows a high level of satisfaction among plan sponsors
(80%-90%) with various risk management actions they have taken to
date. The survey data also demonstrates continuing interest in lump
sum cashouts and buyout activity.
Risk transfer trends
The risk survey found that nearly two thirds (59%) of sponsors
surveyed have already offered some type of one-time lump sum
payment to vested DB plan participants. This trend seems set to
continue, as 49% of survey participants stated their companies are
likely to employ some form of lump sum payout in the next two
years.
Annuity buyouts may also be on the rise – approximately a third
(36%) of this year’s respondents state they are likely or very
likely to purchase an annuity in either 2015 or 2016.
“An increase in interest rates could lead to a fast increase in
demand for buyouts. Sponsors need to prepare in advance in order to
position themselves to move quickly in response to changing market
conditions, said Richard McEvoy, Partner, Mercer Investment.
“There’s also a misconception about the cost of a buyout- -most of
the respondents overestimated the costs associated with annuity
buyouts. Those assumptions could weigh heavily on action – or lack
of-- in the buyout market. During 2015, we launched the Mercer
Pension Risk Exchange, offering sponsors more transparent pricing
and exposing sponsors to a wider array of insurers who could
potentially act as transaction counterparties. All of these factors
enhance sponsors ability to capitalize on preferred market
conditions for a buyout.”
Navigating the changing pension landscape
During 2013, funded status improvement was attributed to rising
interest rates and buoyant equity returns. Those gains were
short-lived, however, as funded status plummeted from 88% to 79%
throughout the following calendar year. Going forward, 70% of
sponsors plan to contribute in excess of the minimum required
amount. The main reasons influencing DB activity cited by 2015
survey participants included:
- Mortality
assumptions: The Society of Actuaries (SOA) updated its
mortality assumptions in late 2014, reflecting an increase in
longevity. These new tables were cited by survey participants as
the leading impetus for sponsors (37%) when considering
modifications to pension funding policies and practices in the next
two years.
- Funded
status: Total funding deficit in 2014 rose and aggregate
funding levels sank to 79%, a decline of 9 points from the previous
year1. Funded levels have subsequently improved to an aggregate
level of 84% at the end of Q2 2015.
- Pension Benefit
Guaranty Corp. (“PBGC”) premiums hike: Though not quite as
influential as other factors, 27% of sponsors reported that rising
PBGC premiums would affect changes in their funding policies.
“2014 was a game changer for the pension industry with factors
like new mortality tables and market volatility causing funded
status to decline.” said Matt McDaniel, Partner, Mercer Retirement.
“CFOs need to be attuned to an evolving pension market and use the
best tools and resources available to develop DB strategies that
make the most economic and strategic sense for their
organizations.”
Risk reduction as a multi-pronged approach
Interviews conducted as part of the risk survey demonstrated
that many financial executives were implementing a staged approach
to plan management, dividing up plan participants into segments to
address separately or creating mid-range goals to achieve
equilibrium.
In just a few years, dynamic derisking has moved from cutting
edge to mainstream: 81% percent of sponsors indicated they had
either adopted (42%) or were considering (39%) a dynamic derisking
strategy to reduce risk as funded status improves. According to the
Mercer/CFO Research survey, those that implemented dynamic
de-risking were almost universally satisfied with the outcome
(87%).
Twenty-two percent of those surveyed said they have already
closed plans to new hires, and one- quarter (26%) have either
partially (10%) or completely (16%) frozen their DB plans to get
themselves ‘on sounder footing.’
Overall, the 2015 risk survey data showcased that plan sponsors
have strong desire and commitment to improve funded status and stay
on course with additional DB risk management efforts in 2015 and
2016.
“As market conditions continually change, plan sponsors appear
focused on finding long term strategies and honing their education
for the best options to mitigate risks now and in the future.” said
David W. Owens, Editorial Director for CFO Research and the
report’s author.
1 According to Mercer’s tracking of funded status of the S&P
1500
About the survey methodology
In April and May 2015, CFO Research, in conjunction with Mercer
LLC, surveyed senior finance executives at U.S. companies to
examine the progress companies have made in managing their defined
benefit (DB) plans and their outlooks for their paths forward. This
research follows on similar studies sponsored by Mercer in 2011 and
2013. For this year’s study, we collected 213 qualified responses
to the survey, from finance executives employed at companies and
nonprofit organizations with defined benefit plans that had $100
million or more in assets. We also conducted an interview program
with 10 senior finance executives at large North American companies
with DB plans.
About Mercer
Mercer is a global consulting leader in talent, health,
retirement and investments. Mercer helps clients around the world
advance the health, wealth and performance of their most vital
asset – their people. Mercer’s more than 20,000 employees are based
in more than 40 countries and the firm operates in over 130
countries. Mercer is a wholly owned subsidiary of Marsh &
McLennan Companies (NYSE: MMC), a global professional services firm
offering clients advice and solutions in the areas of risk,
strategy and people. With 57,000 employees worldwide and annual
revenue exceeding $13 billion, Marsh & McLennan Companies is
also the parent company of Marsh, a leader in insurance broking and
risk management; Guy Carpenter, a leader in providing risk and
reinsurance intermediary services; and Oliver Wyman, a leader in
management consulting. For more information, visit www.mercer.com.
Follow Mercer on Twitter @Mercer.
About CFO Research
CFO Research is the sponsored research unit of CFO Publishing.
CFO Publishing and its Innovation Enterprise brand are the leading
global voice in enterprise information and innovation providing
access to cutting edge thought leadership content across 7 distinct
channels including Finance, Big Data, Analytics, Strategy,
Innovation, Digital, & Operations. We specialize in serving the
information needs of the senior finance and business executive with
focused and award-winning content targeted to the Chief Financial
Officer, Chief Data Officer, Chief Strategy Officer, Chief
Innovation Officer, Chief Digital Officer & Chief Technology
Officer. In addition to content channels, our products and services
include live conferences & summits, on-demand video content,
webcasts, white papers, lead generation services, custom events and
custom research. Whether it's delivered online or in person,
everything we produce reflects the company's unshakeable belief in
the power of information to spur innovation within and across the
communities we serve.
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MercerAlayna Francis,
212-345-1315Alayna.Francis@mercer.comorTwitter: @Mercer
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