Insured Pension De-Risking and an Insured De-Risking Glide Path are ways to make real progress toward the goal of sunsetting and terminating frozen defined benefit pension plans...
Pension plans expose sponsors to many risks, not least of which are unpredictable, even uncontrollable costs. Thousands of frozen plans continue to present challenges and companies are looking for answers.
Plan sponsors can benefit from de-risking options with which they may be unfamiliar. Most consider these options at some point and have for decades. Why?
Plan Sponsors are the Final Guarantors. Until they de-risk.
Plan sponsors can benefit from de-risking options with which they may be unfamiliar. Most consider these options at some point and have for decades. Why?
- Market Risk has a direct impact on funding levels.
- Interest Rate Risk relates to unknown future crediting rates and changes to liability discount rates.
- Spread Risk relates to yield curves and spreads that can generate asset/liability mismatches.
- Operational Risk includes changing administration costs, PBGC premiums, etc.
- Demographic Risk include increasing longevity, early retirements, etc.
- Regulatory Risk includes changing regulations surrounding pension plans like the PPA (Pension Protection Act) and FAS 158.
Plan Sponsors are the Final Guarantors. Until they de-risk.
Analysis and Consulting Services
The process used by plan sponsors looking to de-risk and/or terminate their defined benefit plans begins with an analysis of their options, in the context of their situation and objectives.
Usually, after years of frustration with a plan that never seems to get anywhere plan sponsors are often suffering from a state of pension fatigue. For underfunded plans, this often entails some hard looks and include:
Most companies have a de-facto strategy that rising interest rates, coupled with strong investment performance will get their plan to a fully funded point: someday. And when it gets there they’ll look at options then.
These are largely the same strategies companies have used, with some tinkering, for years. Strategies that have gotten the plan into its current state. We often forget that it’s not just interest rates that cause underfunding. Recently we’ve seen changes to PBGC premiums, new mortality tables, and changes to legislation have significant impacts. Changes in interest rates and market volatility are just the most obvious sometimes.
The process used by plan sponsors looking to de-risk and/or terminate their defined benefit plans begins with an analysis of their options, in the context of their situation and objectives.
Usually, after years of frustration with a plan that never seems to get anywhere plan sponsors are often suffering from a state of pension fatigue. For underfunded plans, this often entails some hard looks and include:
- A review of the real economic plan liabilities – not just the accounting and actuarial.
- An analysis of the possibility of “crystalizing” the funding gap, coupled with a realistic examination of financing alternatives.
- Comparison with the accounting/actuarial liability amortization required by the PPA and associated ongoing expenses assuming ongoing current strategies.
- A review of the many options using various tools and approaches, including those reviewed in these materials.
Most companies have a de-facto strategy that rising interest rates, coupled with strong investment performance will get their plan to a fully funded point: someday. And when it gets there they’ll look at options then.
These are largely the same strategies companies have used, with some tinkering, for years. Strategies that have gotten the plan into its current state. We often forget that it’s not just interest rates that cause underfunding. Recently we’ve seen changes to PBGC premiums, new mortality tables, and changes to legislation have significant impacts. Changes in interest rates and market volatility are just the most obvious sometimes.
Pension Buy-Outs (Plan Terminations)
Plans can be closed-out once and for all by offering lump sums to participants that elect them and transferring the plan’s remaining obligations/liabilities to highly rated insurance carriers.
Why terminate a pension plan? Frozen pension plans don’t usually help attract employees - they represent mainly risk to the downside. Even if plan asset values increase they can be used for little else.
Many plans that are fully funded now may no longer be in the future, as history has demonstrated. Liability Driven Investing (LDI) is a partial answer to these dilemmas, total closeout is closer to a 100% answer.
The list of companies with frozen plans continues to increase. This trend is expected to continue as companies try to reduce expenses generated by plans that have outlived their efficacy.
Plans can be closed-out once and for all by offering lump sums to participants that elect them and transferring the plan’s remaining obligations/liabilities to highly rated insurance carriers.
Why terminate a pension plan? Frozen pension plans don’t usually help attract employees - they represent mainly risk to the downside. Even if plan asset values increase they can be used for little else.
Many plans that are fully funded now may no longer be in the future, as history has demonstrated. Liability Driven Investing (LDI) is a partial answer to these dilemmas, total closeout is closer to a 100% answer.
The list of companies with frozen plans continues to increase. This trend is expected to continue as companies try to reduce expenses generated by plans that have outlived their efficacy.
It doesn’t have to be done all at once.
Many buy-outs are done over time on an incremental basis - a partial settlement of retiree’s or terminated vested’s obligations, for instance.
Many buy-outs are done over time on an incremental basis - a partial settlement of retiree’s or terminated vested’s obligations, for instance.
SPGA Placement Services
Group annuities are institutionally priced products that are generally superior, with better rates, to those available at retail. They are used by many companies, large and small, private and public, for profit and non-profit. For those that prefer, actuarially equivalent lump sums are provided as part of an election process.
If a decision is made to implement a de-risking solution the plan sponsor enters into a well-defined process:
Safest Available Annuity
The Department of Labor Interpretive Bulletin 95-1 gives guidance for how companies transfer fiduciary responsibility to annuity carriers. All of CES’s carriers represent that they pass these hurdles. We will perform the due-diligence necessary to assure the companies are highly rated, stable, and pass the Safest Available Annuity standard.
Group annuities are institutionally priced products that are generally superior, with better rates, to those available at retail. They are used by many companies, large and small, private and public, for profit and non-profit. For those that prefer, actuarially equivalent lump sums are provided as part of an election process.
If a decision is made to implement a de-risking solution the plan sponsor enters into a well-defined process:
- Quote preparation and bid process
- Quoting process/execution – “Quote Day”
- Implementation team formation with SPGA carrier
- Information exchange and corroborate actuarial download
- Participant communications
- Deposits and initial payments
- Agreement and contract development
- Execution
Safest Available Annuity
The Department of Labor Interpretive Bulletin 95-1 gives guidance for how companies transfer fiduciary responsibility to annuity carriers. All of CES’s carriers represent that they pass these hurdles. We will perform the due-diligence necessary to assure the companies are highly rated, stable, and pass the Safest Available Annuity standard.
Lump Sum Election Services
Lump sum offers are fundamental to pension plan de-risking - our approach, tools, and advisor network can help participants, plan sponsors, and advisors improve the process qualitatively and quantitatively.
Aimed at improving the Participant Experience is a combination of services for participants with the plan sponsor’s support - helping participants decide which option is best for them.
Participant Forums
The process begins with information. Participants are offered access to lump-sum election education forums/meetings. These sessions are free and made available at convenient locations and times. The events allow members to ask questions about their options and get as much information as they need/want to make their decision. Additionally, interactive webinar versions of the forums, online resources, etc. are made available.
Participant System
Our online system helps users decide which option is best for them and their retirement. It is independent of any particular product, carrier, investment company, etc., with customized versions for each plan. By combining information provided by the plan with the user’s confidentially provided retirement assumptions, users can see the impact of their choices.
Participant Advisors
Participants can also avail themselves of dispassionate advice regarding their election from specially trained local advisors - the personal, human touch. This advice is available in person for those that request such personal service, over the phone, etc. Advisors can then help implement chosen solutions, if desired.
These services are available to all - rank and file as well as the highly compensated.
For more about our Participant Services click here.
Lump sum offers are fundamental to pension plan de-risking - our approach, tools, and advisor network can help participants, plan sponsors, and advisors improve the process qualitatively and quantitatively.
Aimed at improving the Participant Experience is a combination of services for participants with the plan sponsor’s support - helping participants decide which option is best for them.
Participant Forums
The process begins with information. Participants are offered access to lump-sum election education forums/meetings. These sessions are free and made available at convenient locations and times. The events allow members to ask questions about their options and get as much information as they need/want to make their decision. Additionally, interactive webinar versions of the forums, online resources, etc. are made available.
Participant System
Our online system helps users decide which option is best for them and their retirement. It is independent of any particular product, carrier, investment company, etc., with customized versions for each plan. By combining information provided by the plan with the user’s confidentially provided retirement assumptions, users can see the impact of their choices.
Participant Advisors
Participants can also avail themselves of dispassionate advice regarding their election from specially trained local advisors - the personal, human touch. This advice is available in person for those that request such personal service, over the phone, etc. Advisors can then help implement chosen solutions, if desired.
These services are available to all - rank and file as well as the highly compensated.
For more about our Participant Services click here.