Mercer Anticipates Acceleration of Pension
Activity By PLANADVISER
Staff | April 13, 2017
“We have seen many iterations of de‑risking actions
over the past decade, and we see full plan terminations as the
next wave, as many frozen plan sponsors convert from gradual
steps to a Big Bang,” Mercer says.
While combined pre‑funding and risk transfer actions
have typically been economically positive, primarily due to the
substantial increase in Pension Benefit Guaranty Corporation
(PBGC) premiums and other defined benefit (DB) maintenance costs,
many plan sponsors have stayed on the sidelines or managed
pension risk tentatively, Mercer notes in a report.
However, Mercer says, pension sponsors are growing
tired of market and regulatory volatility and are contemplating
bolder action. Potential tax changes that will drive accelerated
pre‑funding make a tipping point imminent. “We have seen many
iterations of de‑risking actions over the past decade, and we see
full plan terminations as the next wave, as many frozen plan
sponsors convert from gradual steps to a Big Bang,” Mercer
concludes.
The private defined benefit (DB) pension market of
approximately $3 trillion dwarfs the total bulk buyouts executed
to date, Mercer notes.
“Over the next five to 10 years, we expect to see a
shakeout of the corporate pension market with substantial
outflows to insurance and household balance sheets in the form of
annuities written by insurers and participants taking their DB
benefit as a cash option,” the report says. The company also
anticipates a number of factors will align in 2017 to accelerate
pension changes and upend the relative inertia of recent years.
“We see an imminent tipping point on pension pre‑funding
that will, in turn, drive (or be driven by) pension risk transfer
opportunities. While many will stick with their ‘hurry up and
wait’ mentality in hopes of a more bullish market, we see an
increasing number of plan sponsors jumping to the endgame. For
frozen plans in particular, voluntary funding to terminate now,
seen as a bold move in the past, may now be a very smart one,”
Mercer says. Link to Article
Proposed Mortality Assumptions Will Increase DB
Plan Costs PLANSPONSOR | April
26, 2017
The Society of Actuaries estimates an increase in
funding target liabilities, PBGC premiums and minimum required
contributions.
The Society of Actuaries has analyzed the Internal
Revenue Service’s proposed increases to the mortality tables that
would apply to single employer pension plans in 2018, and has
found that they will increase Pension Benefit Guaranteed
Corporation (PBGC) premiums by 12%, from $8.6 billion to $9.6
billion.
They would also result in a 2.9% increase in the
aggregate funding target liabilities, raising them by $65
billion, and decrease the aggregate funded status, from 97% to
96%. The aggregate funded percent would fall by a smaller
percentage than the funding target would rise because many plans
have enough surplus to cover the increase in their funding
target, although their surplus would shrink. Plans that have a
deficit on the current mortality basis would see an increased
deficit, and it could be significant. And some plans with a small
surplus would find themselves with a funding deficit. The authors
estimate that the aggregate unfunded funding target (deficit)
would increase 35%, from $63 billion to $85 billion, and the
aggregate surplus would fall 14%, from $314 billion to $271
billion.
This study presents estimates of aggregate
liabilities for minimum funding purposes (funding target) and
funded status based on the following key assumptions:
- Actual contributions continue to follow recent
patterns relative to plan funding levels as determined for
both funding regulations and PBGC premiums;
- Treasury High Quality Market (HQM) corporate
bond yield curve spot interest rates remain constant after
2016; and
- Asset returns after 2016 equal 6% annually.
Based on analysis of solely traditional pension
plans, one might expect a slightly higher increase of 3% to 5% of
aggregate funding target liabilities, depending on the discount
rate and age and gender mix of a plan population. However, the
mortality change does not affect cash balance liabilities to the
same extent as traditional pension plans.
While cash balance liabilities make up a meaningful
portion of the aggregate funding target, the precise portion is
difficult to determine. Form 5500 and its Schedules do not
provide for reporting the portion of liabilities that stems from
cash balance benefit designs. In addition, some plans have both
traditional and cash balance or other hybrid designs. After
analysis and consultation with actuaries working with large
single employer pension plans, the authors estimate that roughly
10% of the aggregate funding target stems from cash balance
designs. Link to Article