Corporate DB Sponsors Slow to Transfer Liabilities

Some defined benefit (DB) plan sponsors are reluctant to transfer liabilities to an insurer, saying it is too expensive, particularly compared with the accounting liability, Mercer says.

However, Mercer points out that accounting liability does not include all costs associated with maintaining the plan. Since October 2013, the cost of maintaining a DB plan continues to be approximately the same as the cost of transferring liabilities to an insurer for the sample plan modeled for Mercer’s U.S. Pension Buyout Index. The current environment allows plan sponsors who have evaluated a risk transfer to execute under favorable conditions, the consultant says.

During March, the index showed the average cost of purchasing annuities from an insurer increased slightly from 108.4% to 108.6% of the accounting liability. The economic cost of maintaining the liability remained level, at 108.7% of the balance sheet liability.

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The index tracks the relationship between the accounting liability for retirees of a hypothetical DB plan and two cost measures—the estimated cost of transferring the pension liabilities to an insurance company (i.e., a buyout) and the approximate total economic cost of retaining the obligations on the balance sheet.

Mercer notes that research from the Society of Actuaries revealing people are living longer than expected may result in actuaries soon updating plan mortality assumptions, which would increase plan liabilities. While no start date has been established yet for when these new life expectancies are to be used, Mercer expects the Internal Revenue Service may require plans to use the new tables to assess funding from 2016 onward, while auditors may expect plan sponsors to reflect the new tables even earlier than that for accounting purposes. The increase to plan liabilities is expected to be greater than any increase seen in annuity prices, which Mercer believes will be another compelling reason for plan sponsors to purchase annuities and transfer the risk.

In addition, the annual per participant premiums for the Pension Benefit Guaranty Corporation (PBGC) were recently increased significantly, from $49 per participant in 2014 to $64 per participant in 2016, and increasing with inflation thereafter, according to the index. This increase of more than 30% is a contributing factor to the increasing costs to plan sponsors of maintaining their DB plan and is a large factor in many plan sponsors’ decisions to transfer liability (see "PBGC Premium Hikes Shake Up Buyout Landscape").

Mercer notes that the current economic environment, combined with the increase in PBGC premiums and adoption of the new mortality tables on the horizon, makes 2014 an attractive time for DB plan sponsors to consider an annuity buyout as an effective risk management tool.

According to Mercer, DB plan sponsors considering a buyout in the future should review their plan’s investment strategy and consider increasing their allocation to liability hedging assets, either immediately, given recent improvements in funded status, or over time as the funded status improves. This can reduce the likelihood of the funded status decreasing again, leading to unexpected additional cash being required to purchase annuities at a later stage.

Initiative to Examine Retirement Savings Policy

The Bipartisan Policy Center has launched a personal savings initiative meant to produce pragmatic policy recommendations for improving the retirement readiness of American workers.

The initiative is being co-chaired by former Senate Budget Committee Chairman Kent Conrad and former Deputy Commissioner of the Social Security Administration Jim Lockhart. Over the course of the next year, says Conrad, the team will craft a package of realistic policy recommendations to address the future savings needs of Americans and will model the recommendations’ projected impact on retirement security and the federal budget. The final recommendations are slated to be released in early 2015.

He adds that in the coming months, the initiative will hold roundtables and issue a series of white papers highlighting challenges related to retirement savings, defined contribution accounts, annuities, Social Security Disability Insurance, and the intersection among housing, student loan debt and savings.

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The initiative will examine key issues such as:

  • Federal policies that encourage and discourage savings, including the tax code;
  • The pending insolvency of Social Security’s disability insurance;
  • The interaction between Social Security and private savings, including defined benefit and defined contribution plans; and
  • The impact of long-term care needs on retirement security and housing as a form of savings.

Additional members of the initiative include a broad range of financial experts, business leaders, former elected officials, academics and other key industry stakeholders. The group will meet for the first time in June.

The Bipartisan Policy Center was founded in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole and George Mitchell. More information about the center’s Personal Savings Initiative, including its members, can be found here. More details about the center are available here.

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