pension-jar
Many companies are considering changing their defined benefit (DB) plans this year, with hybrid structures and cash balance arrangements attracting increased attention, according to a recent Mercer survey of CFOs and financial executives. This appears to represent a shift in thinking about DB plans following a record number of plan terminations in recent years.
According to the survey, half of CFOs do not plan to end DB plans in the near future, which Mercer said suggests they are taking a strategic approach to long-term pension management.
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“With 50% of employees not confident they can turn their retirement savings into a consistent stream of income for the rest of their lives, many organizations are rethinking pension strategies and how best to support their workforce,” said Scott Jarboe, Mercer’s U.S. defined benefit segment leader. “This data shows many CFOs are not retreating from pensions – and that there’s a growing interest in creative plan design and adaptable pension solutions that cater to the diverse needs of the modern workforce, while keeping the risks for the organization at an acceptable level.”
Nearly three-quarters of organizations have adopted dynamic de-risking strategies this year, while nearly 44% have shifted more assets into fixed-income investments to enhance the stability of their pension-funded status, the survey found. There is also a growing reliance on professional oversight, with many organizations opting for a fully outsourced chief investment officer.
Time and expertise constraints have made it difficult for more than half of organizations to make plan changes promptly, according to the report. CFOs expressed a lack of confidence in the ability of their in-house resources to manage DB plan complexities, and as a result, many are turning to data-driven tools, including dashboards and analytics, to guide decision-making and enhance efficiency, Mercer said.
Risk transfer remains key for companies opting to retool rather than terminate DB plans. More than 70% of organizations expect to offer lump-sum payments within the next two years, and more than 60% have either completed or are considering transferring retiree obligations to insurers through annuity purchases, the study said. Mercer noted more than half of respondents indicated they now view annuities as competitively priced.
“After years of rising interest rates, solid equity growth, and careful plan management, many pensions are now sitting on a healthy surplus, with the aggregate funded status of the S&P 1500 increasing to 107% in May,” said Mercer U.S. pension strategy and solution leader Matt McDaniel. “This opens the door for more robust pension risk transfer strategies, flexibility in unlocking surplus, such as covering 401(k) contributions or health benefit costs for their workforce, and strengthens an organization’s long-term financial position through strategic investments.”
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
