Pensions

Pension Risk Strategies Accelerate With Changing Dynamics – Press Release

NEW YORK–(Business Wire)–Mercer, a global consulting leader in advancing health, wealth and
careers, and a wholly-owned subsidiary of Marsh & McLennan Companies
(NYSE:MMC), today announced the results of the Mercer/ CFO Research 2017
Risk Survey, “Adventures in Pension Risk Management,” which finds
that:

  • The reasons for funding are changing:
    80% of plan sponsors have accelerated funding, largely due to
    increasing Pension Benefit Guarantee Corporation (PBGC) fees and the
    prospect of lower corporate taxes;
  • Most companies now have a formal de-risking
    strategy
    :
    A majority of respondents say they now have a
    dynamic de-risking investment strategy in place and are moving forward
    with risk transfer projects;
  • Plan terminations are increasing:
    Almost 60% of respondents claim they are considering plan termination
    within the next ten years. In the 2017 survey findings, about 59%
    indicated their timeline to consider termination was 10 years or less,
    whereas the 2015 survey results revealed only about 46% made such
    considerations.

“Two years ago, mortality assumptions dominated as the main influencing
factor. Today, PBGC premiums and market conditions have emerged as most
cited reasons. Companies feel that the time is right to reduce or
eliminate their pension funding shortfalls.” said Matt McDaniel,
Partner, Mercer. “Continuing the trend we found in our 2015 survey, the
migration towards pension risk transfer and de-risking carries on at an
accelerated pace.”

DB plan funding: choices and trade offs

Nearly 80% of respondents say they are now contributing more than the
minimum level of funding to their DB plans either because they want to
reach specific thresholds or because they aim to fully fund the plan
over a shorter period of time than regulations require. PBGC premiums
tripled between 2011 and 2016 and are expected to quadruple by 2019 –
which has had a notable effect on plan sponsors.

When asked about reasons why they either have increased funding or would
consider doing so, 40% of respondents decided to increase funding to
reduce the cost of future PBGC premiums, and nearly 33% are also
considering funding for that same reason. That combined total of nearly
73% is a notable increase from the 2015 survey results, which found only
about 60% citing PBGC premiums as a deciding factor to fund above
requirement.

“Rising PBGC premiums coupled with potentially falling tax rates really
improves the business case for advance funding.” said Scott Jarboe,
Partner, Mercer. “Even those sponsors without significant cash on hand
are finding that borrowing at attractive rates to fund the DB Plan can
have a significantly positive ROI, while not increasing their total debt
load.”

DB strategy evolves

As many plan sponsors freeze or close plans, their eye moves toward an
ultimate destination. Almost 60% of survey respondents intend to
terminate their plans within the next ten years. Most have a funding
deficit they must overcome first. Closing the funding gap requires a
thoughtful process to balance risk with the prospect of large cash
infusions.

“Sponsors who want to develop a successful pension exit strategy have to
make sure they create a process that evaluates and changes the asset
allocation, lowering pension risk as frozen plans move closer to
termination.” added Mr. McDaniel. “DB Plan sponsors should weigh
considerations such as the plan’s objective, their time horizon, the
magnitude of their obligations and the state of the economy.”

More than eight in ten respondents say they either have a “dynamic
de-risking strategy in place” (42%) or “are currently considering one”
(40%), citing a desire to avoid volatility in their financial statements
as a main reason. Over half of respondents (55%), however, say they
struggle with finding enough internal resources to manage their pension
plan. As such, 52% of those surveyed delegate some or all investment
execution to a third party through an Outsourced Chief Investment
Officer (OCIO) model.

DB or not DB?

Companies continue to weigh the benefits and obligations of maintaining
pension plans. The legacy obligation heavily affects balance sheets, and
for those who have frozen plans, the employee attraction and retention
qualities of pensions are diminished. Companies need to consider the
cost of maintaining a pension plan (including PBGC premiums), the degree
to which it is funded, and the price of settling liabilities.

Nearly 75% of Mercer’s survey respondents say they have already offered
lump-sum payments to certain participants since 2012 – up from 59% from
the 2015 Mercer CFO survey findings. About 50% of all respondents
consider it likely that their companies will take some form of lump-sum
risk-transfer action in the next couple of years – for many of these
sponsors, this will be a second or third lump-sum offer.

A significant number of sponsors have implemented an annuity buyout for
some pension participants, where an insurer assumes responsibility for
the sponsor’s retirement liabilities. Among survey respondents, more
than half (55%) have either completed such an annuity buyout or are
considering it. Many companies are held back by the misconception that
such annuities are either “expensive” (37%) or “very expensive” (25%).
Specifically, these respondents estimate that the cost of an annuity
would require their pensions to post a Projected Benefit Obligation
(PBO) of over 110%. However, Mercer’s experience as the market leader in
annuity placements shows that the majority of transactions occur between
100% and 110% of PBO.

About the survey methodology

The survey collected 175 responses, mostly from CFOs, CEOs and Finance
Directors, with 80% of responses representing DB pension plan assets of
between $100 million and $5 billion. More than half (53%) of respondents
represent companies with annual revenues of between $500 million and $5
billion. Respondents come from a broad range of industries, with the
most sizeable clusters in aerospace/defense and business/professional
services.

About Mercer

Mercer
delivers advice and technology-driven solutions that help organizations
meet the health, wealth and career needs of a changing workforce.
Mercer’s more than 22,000 employees are based in 43 countries and the
firm operates in over 130 countries. Mercer is a wholly owned subsidiary
of Marsh
& McLennan Companies
(NYSE: MMC), the leading global
professional services firm in the areas of risk, strategy and people.
With more than 60,000 colleagues and annual revenue over $13 billion,
through its market-leading companies including Marsh,
Guy
Carpenter
and Oliver
Wyman
, Marsh & McLennan helps clients navigate an increasingly
dynamic and complex environment. For more information, visit www.mercer.com.
Follow Mercer on Twitter @Mercer.

About CFO Research

CFO Research, an Argyle company, has been a trusted source of insight
into the business issues that matter most to finance professionals since
its founding in 2000. CFO Research is the sister firm of CFO Magazine,
and relies on senior finance executives to share their experiences,
insights, and observations on critical business issues. This
cutting-edge research supports critical business decisions by our
sponsors, as well as their thought leadership positioning and marketing
efforts.

Important Notices
2017 Mercer LLC. All rights reserved.

References to Mercer shall be construed to include Mercer LLC and/or its
associated companies. Mercer does not provide tax or legal advice. You
should contact your tax advisor, accountant and/or attorney before
making any decisions with tax or legal implications. This does not
constitute an offer to purchase or sell any securities.

The findings, ratings and/or opinions expressed herein are the
intellectual property of Mercer and are subject to change without
notice. They are not intended to convey any guarantees as to the future
performance of the investment products, asset classes or capital markets
discussed. This does not contain investment advice relating to your
particular circumstances. No investment decision should be made based on
this information without first obtaining appropriate professional advice
and considering your circumstances.

Information contained herein may have been obtained from a range of
third party sources. While the information is believed to be reliable,
Mercer has not sought to verify it independently. As such, Mercer makes
no representations or warranties as to the accuracy of the information
presented and takes no responsibility or liability (including for
indirect, consequential, or incidental damages) for any error, omission
or inaccuracy in the data supplied by any third party.

Mercer
Alayna Francis, 212 345 1315
Alayna.Francis@mercer.com
Follow
Mercer on Twitter: @Mercer

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