A resilient future: Managing risk in an interconnected world
In the May issue of The Actuary, we examine how our increasingly interconnected world makes it challenging to predict future outcomes.
The prevalence of defined benefit (DB) plans has been declining for decades as U.S. employers have moved to defined contribution (DC) plans. Just look at the numbers:
Type of retirement programs among private industry workers1 :
Within these numbers, private sector DB plans are at different stages in their lifecycles. As of March 1, 20172:
For plan sponsors that have resolved to terminate their plans, they typically turn their attention to two important factors: financial and operational readiness.
When interest rates rise (typically leading to better funded status), the best-prepared plan sponsors are those that are both financially and operationally ready.
Typically, plan sponsors begin winding down their pension plans years before the plan termination date. Plan design changes, such as closing the plan to new hires or freezing benefit accruals, are one step in the path-to-termination. Others are finding the right mix of contributions and investment risk to optimize volatility-adjusted returns in their plans. At any rate, the primary focus remains on preparing the plan to terminate from a financial perspective. Therefore, when plans reach full funding on a plan termination basis, it surprises many plan sponsors how much data clean-up is left before the plan termination process can officially begin.
Clean data is key to a successful plan termination, so it’s important to know where you stand. Through proactive data scrubbing, you can use existing staff (if available) to clean up the data over time, which reduces the need to hire outside resources to comb through files and archived electronic data. By tackling data issues now, you (1) put yourself in the driver’s seat to prioritize work, (2) avoid duplicative efforts common in last-minute exercises, (3) uncover and remediate data gaps, and (4) avoid costly delays resulting from attempts to fill data gaps in a compressed timeframe.
Not being able to complete the plan termination process in a timely manner can be costly. For example, capital markets can shift dramatically between when a plan starts the termination process to when it liquidates plan assets. While Liability Driven Investing (LDI) strategies mitigate the risk of dramatic swings in funded status, it’s difficult to protect against all possible scenarios. Even a 1% change in funded status due to delayed plan termination can result in millions of additional contributions. On the flip side, you can benefit from competitive annuity provider pricing when you have the ability to react quickly to market conditions, which is made possible by being operationally ready.
You can take steps today to begin preparing for termination, by working with your actuary or pension plan administrator to:
To learn where your plan stands on the path-to-termination, email us.