Corporate pension plans ramping up focus on reducing liabilities through risk transfers

More U.S. corporations with pension plans are concentrating on managing the benefits and liabilities of their plans, according to a survey from Aon.

In Aon's Global Pension Risk Survey 2017, U.S. corporations are continuing to focus on decreasing their pension plan size, adopt and facilitate asset-liability frameworks, and increase the size of their pension contributions, said Rick Jones, senior partner in Aon's national retirement practices group, in a telephone interview.

Among the approximately 100 plan executives surveyed, 39% say they are very likely or somewhat likely to implement lump-sum offer windows to former employees who are vested in their plans in an effort to reduce their pension plan size over the next 12 to 24 months. Forty-three percent said they have already implemented such an offer window. Thirty-three percent say they are very likely or somewhat likely to implement a group annuity purchase from an insurance company to transfer pension liabilities over the next one to two years. Eight percent have already purchased a group annuity.

Aside from the outright transferring of liabilities, more plans are continuing to reduce their equity exposure and increase fixed-income investments in an effort to manage their liabilities. When asked to which asset classes they have reduced exposure over the last 12 months, domestic and international equities received the highest responses at 21% and 18%, respectively. When asked to which asset classes they have increased their exposure, the highest was corporate fixed income at 21%.

Plans have also significantly accelerated their pension contributions, Mr. Jones said. He cited a "growing impatience" with stagnant funding ratios and the desire to reduce the variable PBGC premiums they have to pay.

"U.S. funded status has hovered around 80% despite some pretty strong returns," Mr. Jones said.

The Pension Benefit Guaranty Corp. variable rate is based on the unfunded obligations in a defined benefit plan, as opposed to the fixed rate, which is based on the number of participants in the plan. The variable rate in 2017 is $34 per $1,000 of unfunded vested benefits, and that number is going up to $38 in 2018 and $42 in 2019.

When asked what the primary reason for making additional contributions was, 70% said they did so to reduce PBGC premiums.

Mr. Jones also cited potential corporate tax reform and a "desire to lock in, if you will, at potentially higher corporate tax deductions," contributing several years' worth of minimal required contributions. Some of those accelerated contributions have been funded with debt.

About 100 plan executives representing $400 billion in assets responded to the survey.