elderly man with hands protecting his piggy bank (Photo: Shutterstock)

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Limiting risk, compared with eliminating it altogether,is a consideration for employers seeking to manage the risks of defined benefit plans, and a new whitepaper from Massachusetts Mutual Life Insurance Company explores thepros and cons of a range of strategies.

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The paper "Key decisions for de-risking your pension plan"looks at multiple strategies, including freezing plans to newentrants, hibernating plans, reallocating investment assets orshifting pension obligations to a life insurer as part of a pensionrisk transfer.

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

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In a statement, Drzewiecki is quoted saying that while there areboth short- and long-term risk management strategies employers canconsider, "More employers are concluding that transferring thoserisks to a life insurer is in the best interests of the company andits employees."

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Longevity is increasing the risk faced by DB plans, since itrequires payments for more years and greater funding of plans, andthere has been a steady growth of pension buyouts as a method ofmanaging risk.

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

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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."

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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 tradeoff 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. Purchasing annuities as part of a PRT transactionoffloads longevity risk while replicating a DB plan's pensionbenefits. It also provides the services required to supportannuitants.

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Marlene Satter

Marlene Y. Satter has worked in and written about the financial industry for decades.