Pension Plan Risks & De-risking Strategies

Pension Plan Risks & De-risking Strategies

Funding defined benefit plans can be challenging, especially during times of economic volatility. For many companies, a pension plan is one of the largest items on the corporate balance sheet, but it is not a core component of the business.

Defined benefit plan sponsors have the opportunity to improve both corporate and plan financial statements and reduce Pension Benefit Guaranty Corporation (PBGC) premiums by adopting programs to reduce risk in their pension plans.

So what risks are plan sponsors facing, and what can be done to mitigate these risks?

Risks of Pension Plans

Sponsors of defined benefit plans face many risks, including:

  • Interest Rates: Higher rates reduce costs; lower rates increase them. 
  • Investment Returns: If plans lose money or even fail to gain as much as expected, contribution requirements can increase.
  • Operational: The Internal Revenue Service (IRS), Department of Labor (DOL) and PBGC are all federal organizations with pension plan oversight. In recent years, increasing PBGC premiums have been an issue, as well as IRS and DOL audits leading to fines for operational failures.
  • Regulatory or Statutory: Federal, state and local regulations are subject to change, with a trend in recent years toward tighter accounting controls.
  • Longevity:  Since the average American’s life expectancy is increasing, participants are receiving benefits for longer periods of time, which increases costs.

De-risking Strategies

The only way to truly eliminate long-term risk is to terminate the plan. However, termination is a long, complicated and expensive process. When plan termination is not feasible, there are several ways to mitigate risk by reducing the size, costs or volatility of your pension plan. Taking these steps now can make plan termination easier and less expensive later.

  • Soft Freeze: Limit participation by restricting the plan to employees hired by a certain date. You can also freeze benefit service or limit future pay increases to reduce future costs.
  • Hard Freeze: Freeze or reduce future benefit accruals for active employees or eliminate future increases to retirees. Hard freezes can reduce future costs more quickly than soft freezes.
  • Lump Sum Window: Allow participants to take the value of their plan benefit as a one-time lump sum and subsequently be removed from the plan, reducing PBGC premiums and administrative costs.
  • Annuity Buy-in: Purchase a group annuity contract from an insurance company to pay benefits for some or all plan participants, reducing investment and longevity risk.
  • Annuity Buy-out: Transfer the plan’s assets and liabilities to an insurance company, relieving your company of its obligation to the participants while reducing PBGC premiums and administrative costs.
  • Asset Liability Modeling: Mitigate economic risks by modeling the plan’s projected future cash flows and balancing return-seeking investments with capital preservation vehicles based on these projections. Integrating the contribution policy and investment policy can further reduce investment and interest rate risk. As contributions are made to improve the plan’s funded status, the company can gradually move to safer investments to protect the plan’s improving funded status and reduce the amount needed for plan termination.

These de-risking strategies can be tailored to your company’s unique goals, objectives and risk profile. However, be aware that there are specific rules that must be followed for plan freezes, lump sum windows and annuity purchases

Connect with a consultant to help evaluate potential de-risking strategies for your organization.

Investment advisory services provided through CBIZ Investment Advisory Services, LLC, a registered investment adviser and a wholly owned subsidiary of CBIZ, Inc.

Third-party administration, actuarial and other consulting services offered through CBIZ Benefits & Insurance Services, Inc.

Pension Plan Risks & De-risking Strategies Sponsor-3.jpg?ver=NoxcmKmMp2guhFpxIO2gqA%3d%3dEconomic volatility can make funding defined benefit plans challenging. What risks are plan sponsors facing, and how can they mitigate these risks?​​2024-07-02T17:00:00-05:00Economic volatility can make funding defined benefit plans challenging. What risks are plan sponsors facing, and how can they mitigate these risks?NoneInvestment AdvisoryRetirement Plan ServicesNo