Should Plan Sponsors Purchase Annuities
for Their Pension Plan?
PlanSponsor | October 22, 2018 | David Davala, Sr.
Consultant at Findley
David Davala, with Findley,
discusses considerations for defined benefit (DB) plan sponsors
before deciding whether to transfer some of their pension risk to
an annuity provider.
At times, the recommendations of trusted advisers
can seem to be at odds. This may be true concerning whether to
use an annuity purchase to de-risk a company pension plan. How
does the plan sponsor get to the best answer? Consider this
Recent reports show that pension plans have
experienced a growth in their funding percentages. Company XYZ’s
pension plan’s funded status has improved over the last year and
a half. The sponsor has also read articles concerning lump-sum
buyouts, plan terminations and annuity purchases.
The phone rings. On the line is an annuity broker.
He explains that there are advantages to purchasing annuities for
some of XYZ’s pension plan participants. This transaction would
transfer the liabilities and associated assets to an insurance
company. The broker goes on to explain the advantages of an annuity
· It lowers a plan’s participant
count, resulting in a lower Pension Benefit Guaranty Corporation
· It lessens volatility in financial
measurements, as the pension liability would be lower;
· It transfers risk;
· It lowers record-keeping and
administrative costs; and
· It removes the requirement for a
plan audit, if the plan’s participant count drops below 100.
The broker also notes that annuities can be
purchased with plan assets.
An annuity purchase sounds like it might be a good
idea to explore. So the sponsor calls the plan’s actuary to
discuss the prospect.
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Sachs: Many Pensions Stand in PRT Goldilocks Zone
PlanSponsor | October 15, 2018 | John Manganaro
If interest rates continue to
rise, this may have a negative impact on equity valuations;
consequently, according to Goldman Sachs research, the present
period may represent a limited window for optimal pension risk
According to Goldman Sachs Asset Management’s new
white paper, “Stars Aligning for Corporate Plans to Take
De-Risking Actions,” almost 25% of U.S. corporate defined benefit
(DB) plans are now in a fully funded or over-funded position.
As the paper’s title indicates, this means many plan
sponsors are in a great position to take further de-risking actions.
“Our work would indicate that the aggregate system-wide funded level hit 91% at the end of
September, the highest level since the financial crisis,” the
paper says. “This represents a five percentage point improvement
in funded status year-to-date and a 10 percentage point increase
since the end of 2016.”
The paper says all of this is occurring when the
S&P 500 has offered strong returns during the first
three-quarters of 2018 and is still close to its all-time high,
despite some rocky days in the second week of October.
“Consequently, many equity market valuation metrics,
as well as metrics for other risk assets, are at the high end of
their historical ranges,” Goldman Sachs researchers say.
“If interest rates continue to rise, this may have a negative impact on equity
valuations, as has been evident over the first few trading days
of October. Consequently, the present period may represent a
window of time when sponsors can seek to lock in gains from both
higher interest rates and equity valuations. This may provide
further impetus for sponsors to consider taking incremental de-risking actions within their portfolios.”
According to Goldman Sachs, a significant portion of
the recent funded status improvements is also attributable to
the notable contribution activity observed ahead of the
September 15 tax deadline. Generally speaking, this was the
deadline for pension plan sponsors to make a contribution in
order to potentially benefit from a tax deduction at the higher,
For full article Click Here or To view white paper Click Here