Participant longevity is increasing the riskfaced by DB plans. (Photo: Shutterstock)

Limiting risk, compared with eliminating it altogether, is aconsideration for employers seeking to manage the risks of definedbenefit plans, and a new white paper from Massachusetts Mutual LifeInsurance Company.explores the pros and cons of a range ofstrategies.

The paper "Key decisions for de-risking your pension plan"looks at multiple strategies:

• freezing plans to new entrants
• hibernating plans
• reallocating investment assets
• shifting pension obligations to a life insurer as part of apension risk transfer

That last is emerging as the choice of an increasing number ofemployers, according to Neil Drzewiecki, head of pension risktransfer for MassMutual.

In a statement, Drzewiecki says hat while there are both short-and long-term risk management strategies employers can consider,"More employers are concluding that transferring those risks to alife insurer is in the best interests of the company and itsemployees."

Participant longevity is increasing the risk faced by DB plans,since it requires payments for more years and greater funding ofplans, and there has been a steady growth of pension buyouts as amethod of managing risk.

MassMutual cites LIMRA Secure Retirement Institute figures thatindicate the growth of PRT to $26.4 billion in 2018, from $3.84billion in 2013.

The report says, "The increase in PRT activity tracks bothincreases in pension funding levels as well as rising premiums paidby employers to the Pension Benefit Guarantee Corp. (PBGC), thefederal agency backstopping pensions of American workers. PBGCpremiums for single-employer plans have more than doubled in thepast 10 years, rising to $80 per participant in 2019."

The white paper examines four different strategies:

1. Hibernating risks—closing a DB plan to new participants—stopsaccruals, which protects against benefit increases, but it does noteliminate other risks, such as interest rate risk.
2. Establishing glide paths moves plan investment allocationstoward fixed income as a plan's funded status improves, andprovides a couple of other advantages: it helps diminish therisk-reward trade off associated with equities, and also provides ahedging effect against the rise or fall of interest rates viafixed-income assets.
3. Hedging risks can take the edge off volatility, although itwon't eliminate all risk and can't hedge against everyeventuality.
4. And last but not least, the purchase of annuities as part of aPRT transaction offloads longevity risk while replicating a DBplan's pension benefits. It also provides the services required tosupport annuitants.

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