Westminster Consulting Brochure Defined Contribution & Defined Benefit | Page 16

Why Should You De-Risk Your Pension Plan?
By Sean Patton AIF

®

Partner/Senior consultant at Westminster Consulting

White Paper

Improvements over the last year in defined benefit plan funding status have plan sponsors
and their fiduciaries considering whether now is the time to take action to reduce future
volatility. For almost the last five years, post the financial crisis, defined benefit plan sponsors
have watched as their funding ratios ride a roller coaster in the wake of 2008. Now that many
are closing in on a funded status that is closer to being fully funded, they want to ensure that
they do not allow that status to fall back into the 70’s and 80’s again. The idea of de-risking,
or finding better ways to manage your plan’s pension obligations, should be at the top of
most plan sponsor’s priority list.
There are many different ways to accomplish this goal. It seems that many plan sponsors
are playing a game of chicken, waiting to see what the Fed’s next move holds. This idea of
trying to guess interest rate movements is akin to trying to time the equity markets – it is
almost impossible to do. Many pension committee’s feel if they move too soon they will leave
money on the table. It is critical that plan sponsors address the many choices they have in
de-risking their plan. This can be done all at once or little by little to soothe the effects of
what you are trying to accomplish.
There are several reasons why the most proactive investment committees are moving to take
action now. The most obvious is the improvement over the last year in funded status. Equity
markets in 2013 were robust and interest rates moved up for the first time in many years.
For some plans, the increase in funded status allowed them to remove funding restrictions
that limit the ability to settle liabilities by paying out lump sums or buying annuities. If
you have implemented a glide path strategy in the past, stay disciplined and do not try and
time the market. If your committee has not reviewed your asset allocation, then now is a
great time to—this will help to ensure you are removing unnecessary risk from your plan.
By implementing some basic diversification strategies on the equity side and examining
matching the duration of your liabilities with the duration of your fixed income portfolio,
you can have real impact on reducing volatility without getting too sophisticated.
The next reason that plan sponsors are being more proactive is that they have some certainty
in their plan right now versus the uncertainty that the future holds. Even if you are tempted
to wait because you expect interest rates to continue to move higher (therefore lowering
your liabilities) know that if you have done any kind of liability matching with your fixed
income, higher interest rates will push asset values and liabilities lower so there may not be
an advantage to waiting. Mortality table increases that took effect in 2015 have increased
the cost of annuities and lump sum cash-outs. If your committee holds a strong view on
the direction of interest rates, consider the idea of adding a couple triggers to the glide path
implementation—one on funded status and the other on interest rate levels to ease into
hedging your portfolio.
Lastly, PBGC premiums are increasing again. Sponsors with underfunded plans will pay
additional risk premiums of $24 per $1000 of plan underfunding. This is up from $14 in
2014. This will move to $29 in 2016. Risk premiums will decrease as your funded status
increases. Committees that proactively review their pension plan and implement strategies
to de-risk should receive the benefit of improved funded status which will reduce these
premium’s plan over time.

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