DB Lump-Sum Offerings Will Continue in 2013

Aon Hewitt surveyed 230 U.S. employers with defined benefit (DB) plans, representing nearly five million employees, and found more than one-third (39%) are somewhat or very likely to offer terminated vested participants and/or retirees a lump-sum payout during a specified period in 2013. Just 7% of DB plan sponsors added a lump-sum window for terminated vested participants and/or retirees in 2012.  

As a first step in their broader de-risking efforts, employers are contemplating what different economic scenarios would mean to their plan. Half indicated they are likely or somewhat likely to conduct an asset-liability study in 2013, and 60% are somewhat or very likely to have their investments better match the characteristics of the plan’s liability through approaches such as liability-driven investing (LDI).   

“There is no question, employers are looking for new ways to aggressively manage their pension volatility,” explained Rob Austin, senior retirement consultant at Aon Hewitt. “In 2012, many DB plan sponsors were exploring options and planning their strategies—we think 2013 will be the year when many more actually implement large-scale actions such as offering lump-sum windows. Pension Benefit Guarantee Corporation [PBGC] premiums will begin to increase in 2013 and 2014, which will increase the carrying cost of pension liabilities and give plan sponsors an economic incentive to transfer those liabilities off their balance sheet.”

Aon Hewitt’s survey found that while just 18% of defined benefit plan sponsors currently use a glide path investing strategy, the percentage is expected to nearly double, to more than 30%, by the end of 2013. This shift comes as more plan sponsors abandon the traditional approach of investing a majority of plan assets in equities. While 52% of plan sponsors favor this majority equity strategy now, just 31% will use this approach by the end of the year.    

“Plan sponsors are taking a more holistic view of their pension plan by looking at the overall funded status of the plan and not focusing on the liabilities or assets individually,” explained Austin. “A glide path approach provides an easy link between the two. Additionally, this approach allows plan sponsors to have a long-term strategy in place that will systematically eliminate risk over time.”  

Most employers (84%) reported they will not make any change to the benefit accruals they offer workers. Of those that are planning changes, fewer than one-in-five (16%) are somewhat or very likely to reduce DB pension benefits, while 17% are somewhat or very likely to close plans to new entrants in 2013. Just 10% are somewhat or very likely to freeze benefit accruals for all or some participants.