While many local companies have closed or frozen their pension plans to limit pension liability growth, few are funded well enough to terminate today and settle their obligations.
Following the release of a new mortality table and projection scale by the Society of Actuaries (SOA) in the fall of 2014, which has pension participants living longer, plan sponsors saw their liabilities increase by an additional 7 to 10 percent. In addition, plan sponsors are facing higher annual administration costs as a result of ever-increasing PBGC premiums. As a result, companies are looking for solutions to reduce pension risk by shrinking the size of their programs. A recent report from Clear Path Analysis found that more than half of U.S. pension professionals were either very likely to or were considering a transfer of their risk to a third- party insurer or implementing a lump sum program for defined benefit participants.
As companies are looking ahead to see what they can do to erase the risk of employee pension plans, here are the best ways to execute the strategy.
1.) Open a lump sum window: The most common way to de-risk employee pension plans is to offer former employees a one-time window of opportunity to elect cash today in lieu of a lifetime annuity in the future. Today, this option is very attractive to employers as the cost of the lump sum is generally 7 to 10 percent lower than the liability they are carrying on their corporate balance sheet for these participants. The higher balance sheet liability is attributable to projected improvements in life expectancies that are not yet included in the lump sum calculation, although the actuarial community widely expects the IRS to publish new mortality tables to be effective by 2018.
2.) Maximize ROI: Companies should structure the window to achieve the highest acceptance rate. This can be accomplished by limiting the offer to participants with smaller lump sums (i.e., not more than $25,000) or including all or a portion of any early retirement subsidies in the calculation of the lump sum.
3.) Outsource: Outsourcing allows a plan sponsor to focus on its core business rather than focusing on the employee benefit plan administration. This option also provides sponsors with access to resources need- ed for de-risking projects without competing for internal resources or putting other important HR projects on hold. By outsourcing today, sponsors can begin to collect and image all of the data needed for the eventual termination of the plan. Imaging of paper records will prevent loss due to flood, fire or human error (misplacing). Most importantly, outsourcing will eliminate the risk of operational failures for the plan sponsor until the eventual termination of the plan.
4.) Choose appropriately: When selecting an outsourcing partner, sponsors should consider the following:
- Commitment to client and participant service
- Focus on technology and efficiency in providing day-to-day services
- Adherence to plan rules and governmental regulations
- Plan sponsor reporting (operational metrics)
5.) Develop a contribution policy: Funding relief is keeping contributions lower today, but taking advantage of the relief generally means higher PBGC insurance premiums and higher contributions in the future.
In addition, plan sponsors who make the minimum required contribution will never reach the funding level needed to terminate the plan. CFOs should consider developing a 5 to 10 year contribution policy to reduce contribution volatility and improve the plan’s funded status. Higher contributions today will also have the effect of reducing annual PBGC insurance premiums for under-funded plans.
Ed Bishop is executive vice president and business unit president of CBIZ Savitz, a division of CBIZ Retirement Plan Services.
Published (and copyrighted) in South Jersey Biz, Volume 6, Issue 12 (December, 2016).
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