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.
private defined benefit (DB) pension market of approximately $3
trillion dwarfs the total bulk buyouts executed to date, Mercer notes.
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
“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. NEXT: Factors driving the change