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Pension Funds

U.S. corporate plans report stronger funding levels, more derisking in store

U.S. corporate and health-care organization defined benefit plans have seen improved funding ratios, and more of them intend to explore further derisking strategies due to upcoming PBGC premium increases, an NEPC survey says.

Among the 143 respondents representing $169 billion in assets surveyed in August, 19% said their funding ratios were above 101%, up from 9% the previous year. Twenty-seven percent of respondents said their funding ratios were between 90% and 100%, down from 34% in 2016. Another 25% said their ratio was between 80% and 89%, down from 29%, while 22% said their ratio was between 70% and 79%, up from 19%; and 7% said their plan had a funding ratio of less than 70%, down from 9%.

Among plans with funding ratios of less than 100%, 25% said they were considering additional contributions because of pending hikes in PBGC premiums. Variable PBGC premiums, which are determined by the level of a plan's underfunding, have skyrocketed in recent years. As recently as 2013, the rate was $9 per $1,000 of underfunding; it now is $34 per $1,000 of underfunding and will rise to $38 in 2018.

"The PBGC rate premium decision has had a major and lasting impact on plan sponsors and their strategies," said Brad Smith, partner in NEPC's corporate practice, in an email. "Not only have we seen an increase in overfunded plans to help hedge against these premiums, we're also seeing plans accelerate the derisking process and move down the glidepath more quickly. With so much at stake, we don't expect plan sponsors' anxiety toward rate premium increases to subside."

In 2017, 35% of respondents said they had modified glidepath trigger points, up from 23% the previous year, whole 53% made no change, down from 74%. Twelve percent of survey respondents, meanwhile, said they increased risk in their portfolios in 2017, up from 3% the previous year. Among those respondents, 75% had funding ratios of less than 90%.

NEPC surveyed defined benefit plan executives from both corporations and health-care organizations. Among those corporations surveyed, 59% said they use liability-driven investing in their plan, while 56% of health-care organizations implement LDI. Twelve percent of corporations do not now use LDI but are considering it, while 9% of health-care organizations do not utilize it but are considering it.

Despite the emphasis on derisking, the percentage of respondents that have either made or are planning lump-sum offers to terminated vested participants who have yet to retire fell to 75% in 2017 from 87% in 2016. A news release on the survey results said the drop is likely from plans already having issued lump-sum offers and experiencing diminishing returns from repeated offers.

When asked whether they have implemented or are planning group annuity purchases from insurance companies to transfer their plan liabilities, 13% said they had done so, up from 11% in 2016. However, interest in future transactions decreased to 18% in 2017 from 28% the previous year.