Large corporate pension plans significantly improved their financial footing in 2021, setting up the new year for more pension risk transfers and big companies exiting defined-benefit retirement plans altogether.
The aggregate pension funding status of 361 top Fortune 1000 companies improved to 96% last year, according to a new
Traditional pension plans—which workers often prefer over 401(k)s because they guarantee a stable source of income later in life—have withered over the past two decades under tough funding standards and shaky markets. The number of U.S. defined-benefit plans has declined by 73% since 1986, according to the U.S. Labor Department.
Faced with that precedent, many employers are likely to use the 2021 funding respite as an opportunity to shed responsibility for making payments or buy out workers.
“The improvement in funded status coupled with changes in the funding rules provide plan sponsors an opportunity to move their pension strategy forward in 2022,” said Jennifer Lewis, senior director for retirement at Willis Towers Watson. “Depending on the sponsor’s objectives, that strategy may include executing more pension risk transfers, positioning the plan for the long term, or a combination of both.”
De-risking and Liability
Pension funding improved in 2021 because corporate interest rates rose and markets proved resilient to pandemic uncertainties, said Joseph Gamzon, managing director of retirement at Willis Towers Watson. Overall investment returns averaged nearly 9% in 2021, he said. Combined with changes in funding rules, plan sponsors now have a good excuse to make permanent changes that will mitigate their exposure to future risk.
Many companies “de-risk” their pension plans by employing pension risk transfers, which buy out workers still enrolled in the plan or transfer responsibility to an insurance company that will try to balance annuity payments with existing assets to make a profit.
But there’s a catch: The cost of the buyout or insurance contract has to take into account the plan’s unfunded liability.
Average aggregate pension funding levels for Fortunate 1000 companies since 2008 has hovered just under 82%. At 96% average funding at the end of last year, the cost of exiting a plan in 2022 just got a lot cheaper.
“Companies may decide this is a much rosier time,” said Gamzon. “This year is going to be strong for pension risk transfers, there’s no doubt about that.”
In many ways, the trend already has started. Third-quarter premium pension buyout sales in 2021 tripled over 2020 totals, according to the Secure Retirement Institute. Asset management company Mercer, a
Still, the consequence of risk transfers on participants is mostly unknown.
State insurance laws put strict funding liabilities on federally improved firms, so insurers usually have to make their payments, but how well retirees or workers are informed about the switch is less certain.
Lawmakers broached the subject at an October hearing to consider President
“These entities are seeking to profit off of the spread between investment returns and the benefits that are paid, and they often end up moving the assets away from traditional secure investments into much riskier investments,” said Sen. Chris Murphy (D-Conn.). “Some of the companies that do this were among those that we had to bail out in 2008 and 2009.”
Gomez said she would commit to looking into the issue to ensure that de-risked assets are in the best interest of workers and their families.