It’s no secret that defined contribution plans have been gaining ground at the expense of defined benefit plans. And there certainly is no dearth of explanations for that trend. A recent blog entry discusses some of the challenges that are causing employers and plan sponsors to think longer and harder than they probably did in the past regarding what they’re doing with their DB plans — and what their responses are.
In “To DB or Not to DB?
,” an entry on CFO.com, Chris Schmidt looks at the challenges entailed in offering and running a DB plan. He does it from the perspective of a chief financial officer, whom he notes sometimes find themselves having to serve as DB plan managers.
What are CFOs concerned about in this regard? “Funding choices are near the top of the list,” Schmidt writes, and argues that “it’s an opportune time to retire funding shortfalls to avoid increases in costs” and cites a Mercer study that says increasing discount rates and positive equity markets have resulted in higher aggregate funding of pension plans sponsored by S&P 1500 companies.
The U.S. senior finance executives CFO and Mercer surveyed say that there are other factors affecting their approach toward DB plans and “are not just relying on the math for help.” For instance, Schmidt says, more than half cite the administrative burden of running a plan and report that they “struggle to find the time and expertise required to fully meet [their] obligations related to overseeing the investment strategy of [their] organization’s pension plan.”Polar Vortex
Just over 40% of the CFOs and senior finance executives reported that their plans are at least partially frozen. And while it’s still summer for the plans of the other almost 60%, the warmth may fade soon. Their plans are open and accruing for all eligible employees now, but 46% of them say that it is at least likely that their DB plans will be closed to new employees in the next two years, and 35% plan to close their plans and freeze everyone’s accruals.
And as the pension glaciers advance, another consequence is increased interest in de-risking, the study reports. A strong majority — more than 80% — either have such a plan in place or are considering one.
Like land covered in glaciers that won’t grow anything, frozen plans lose their power to help grow and sustain a workforce. They become an icy burden which employers may want to unload. So it should come as no surprise that CFO/Mercer found strong affection for lump-sum payments as an answer — to the tune of 75%. In addition, more than half said it is likely that they will pursue some king of lump-sum risk transfer in the next two years.But Some Lingering Heat
There is no dearth of research showing that plenty of plans are underfunded. But many of the CFOs and financial executives plan to change that if they are not already doing so. In fact, writes Schmidt, almost one-quarter are so intent on increasing their funding levels that they are not only pre-funding, they are borrowing to do so.
But the motivation to improve funding isn’t simple magnanimity toward pensioners depending on the plan, at least for these respondents. Almost three-quarters have increased, or are planning to increase, pension contributions in order to reduce the Pension Benefit Guaranty Corporation (PBGC) premiums they pay. Many also say they are doing so to reduce their federal corporate tax burden.