As low interest rates and growing deficits continue to blight corporate defined benefit funds, sources expect to see more plan sponsors globally freeze or otherwise alter their retirement offerings.
Last month airline operator British Airways became the latest in a string of corporations to announce a potential freeze of its DB plan, the £15.5 billion ($21 billion) New Airways Pension Scheme, London, in an effort to plug a £3.7 billion deficit.
Other private-sector moves this year include:
U.K. workers at BMW voted in July to accept a revised offer to freeze two U.K. pension plans. U.K. DB assets were a combined €8.7 billion ($10.4 billion) and deficits totaled €1.6 billion, as of Dec. 31.
Also in July, global engineering business GKN PLC froze two U.K. DB funds following discussions with affected employees and unions. The total net asset value for the funds was £2.5 billion, with a combined accounting deficit of £1.06 billion. Participants were transferred to the firm's defined contribution plan.
United Parcel Service Inc., Atlanta, said in June it will freeze two DB plans in 2023. The $18.6 billion UPS Retirement Plan had a funded status of 73.5% as of Dec. 31. UPS does not report the assets or funded status of the second plan, the UPS Excess Coordinating Benefit Plan, because it is a non-qualified excess plan that represents less than 1% of UPS' pension assets, a company spokesman said.
Corporations seem to be struggling with their DB obligations. Recent data from MSCI Inc. on global corporate funding of retirement obligations show the gap between required payouts and the resources set aside to fund them was largely unchanged in 2016 from the year before, but significantly worse than in 2007.
In its latest Global Pension Study, MSCI said the median funding level for the largest U.S. companies in 2016 was about 82% of projected benefit obligations vs. 100% in 2007. North American and Western European corporations showed the highest average ratio of underfunding in 2016, said MSCI.
"Corporations have been closing their DB plans to further accruals, and generally have been trying to reduce their pension exposure by having more investments be liability driven, thus reducing the exposure to swings in yields," said Agnes Grunfeld, New York-based vice president at MSCI and author of the survey report. "However, this also lowers exposure to investments that might enable pension assets to grow more robustly. Another strategy is to transfer the risk to insurance companies by buying annuities for covered retired employees. Unfortunately, the companies that are in trouble can't easily afford the premiums."
Ms. Grunfeld added that trustees "will have to consider allowing or even encouraging companies to take more investment risk — for example, reversing the trend away from equity and other growth investments."