U.S. corporate defined benefit plans are seeing a significant improvement in their funding ratios, which are leading to triggers in the glidepaths of their liability-driven investment portfolios, according to a new survey by investment consultant NEPC.
Of the corporate pension plans surveyed by NEPC in September, 67% use liability-driven investments and of that total, 48% said they have hit triggers in their LDI glidepaths since January, allowing them to derisk further, according to NEPC's 2021 Defined Benefit Trends Survey of 76 corporate pension plans with combined assets of $115 billion. The survey was conducted in September.
Of those plans that hit triggers and took action to derisk their plans, 89% said they were able to do so due to a change in estimated funded status resulting from market movements.
Thirty-one percent of respondents said their funding ratios now exceed 100%.
When asked about further derisking actions, 68% of survey respondents said they have implemented a lump-sum offer of some kind to participants, with 12% saying they are planning to do so.
Meanwhile, when asked about pension buyout transactions involving a group annuity contract purchased from an insurance company, 20% said they have implemented a buyout transaction, while another 20% are actively planning a buyout.
Buy-in transactions, in which a corporation purchases an annuity contract to insure pension liabilities but retains those liabilities, are more rare. Only 8% of survey respondents have implemented buy-in transactions, while another 6% are actively planning to complete one.
Finally, 3% of respondents said they have implemented a plan termination, while another 12% are actively planning to terminate at least one of their pension plans.
"If funded status continues to increase and discount rates rise, we may see more plan sponsors revisit the merits of annuitization," said Bradley S. Smith, partner at NEPC and member of the firm's corporate defined benefit team, in an Oct. 28 news release announcing the survey results. "Half of plan sponsors in NEPC's 2021 survey looking to terminate don't plan to for the next two to seven years, so it's crucial to have an immunization strategy that can protect current funded status gains. As an independent, research-driven team, we're able to take a long-term view to preserve and grow pensions for financially secure retirements."
NEPC has been conducting the survey since 2011, and in the news release, the firm said U.S. corporate DB plans have significantly increased their LDI allocations in that time.
In this year's survey, 42% of respondents said their LDI allocations were above 51%, compared with 9% of respondents in the 2011 survey.
NEPC said it will release the full survey results in January.
