The opportunity for companies to shed the risk and responsibility of pension obligations has led them to explore their options. Many have closed or terminated plans; others have opted to divest some or all of their obligations. Each exit strategy comes with its own hurdles, often dictated by the market. The ultimate goal remains: eliminate investment and actuarial risks, improve the company's balance sheet and focus on core operations.
Overly optimistic: Plan sponsors have been lowering their return assumptions to meet declining returns. Many have closed, frozen or terminated their plans; only 33% of Fortune 500 company plans were open at the end of 2015, down from 81% in 2005.
Premiums rise: Annual PBGC premiums remained stable in the years immediately after the PPA went into effect, with modest increases in the flat rate and static variable rates. However, beginning in 2013, both rates saw annual, and often sharp, increases.
Paying to offload: When insurance companies take on plan assets they require additional premiums to account for the risks and costs associated with the obligation. Furthermore, they often make more conservative actuarial assumptions, which can add to the premium.
Best options: Market conditions will dictate which options are better suited to shedding pension obligations. Interest-rate volatility favors lump sums, and positive market performance will drive buyouts/-ins. Sponsors prefer the former, as it takes the decision to stay in the plan out of participants' hands.
*Scheduled increases. Sources: P&I Research Center; Society of Actuaries; Pension Benefit Guaranty Corp.;
Mercer; Willis Towers Watson;
Compiled and designed by Charles McGrath and Gregg A. Runburg