More U.S. corporations are freezing their defined benefit plans as a reflection of their concerns with the risk of their plans’ funding ratios as well as the overall cost of their plans, a new report from Vanguard Group says.
Of the 178 plans representing $181 billion in assets whose executives participated in Vanguard’s “Survey of Defined Benefit Plan Sponsors,” 30% were open in 2015, compared with 43% in 2012 and 59% in 2010, which was the first time Vanguard surveyed plan sponsor executives.
The percentage of plans frozen to benefit accruals, meanwhile, rose to 37% in 2015, compared to 31% in 2012 and 16% in 2010. Closed plans rose to 34% of all plans in 2015, compared to 25% in 2012 and 19% in 2010.
When it came to the overall average asset allocation in 2015, however, the result was the same as 2012: 48% equities, 39% in fixed income, 11% in alternatives and 2% in cash.
The average asset allocation when measured by plan status, however, reflected the concern with risk, the report said. Frozen plans, for example, had an average of a 41% allocation to fixed income in 2015 compared to 32% for open and active plans. The average equity allocation for frozen plans was 47% compared to 48% for open and active plans, while the average allocation to alternatives for frozen plans was 9% compared to 17% for open and active plans.
When asked what their primary investment objective for their defined benefit plans was in 2015, 28% said “minimizing volatility in plan contributions and funding ratio,” the same as in 2012. The second-highest response as a primary investment objective was “obtaining full funding” in 2015, compared to 17% in 2012. The third-highest response was “minimizing the long-term cost of the pension plan” at 17% in 2015, compared to 22% in 2012.
The use of liability-driven investing strategies also rose in 2015, to 80% of respondents, compared to 68% in 2012.
The report is available on Vanguard’s website.
