Pandemic impacts DB plan funding, pension de-risking strategies
Plan sponsors report a broad range of impacts to their companies and plans resulting from COVID-19, including de-risking plans and funding DB plans.
The COVID-19 pandemic is having a broad impact on the majority of defined benefit plan sponsors and could influence their plans to de-risk their pension plans, according to a new survey by MetLife.
The survey, 2020 Pension Risk Transfer Poll, included more than 200 plan sponsors with more than $100 million in plan assets to learn more about their perspectives on COVID-19 and their de-risking plans and goals. The report predicts about $3 trillion in DB pension plan liabilities will flow through the pension risk transfer pipeline over the next ten years.
COVID-19 and macroeconomic trends are causing concern among plan sponsors about maintaining and funding DB plans in order to ensure they are meeting required benefit obligations. Sponsors are especially focused on making DB plan investments that minimize volatility and managing the impact of the continued low interest rate environment.
Nearly all DB plan sponsors (92 percent) said the COVID-19 pandemic has had an impact on their company, from reprioritizing staff internally to conducting furloughs and layoffs.
Many respondents have borrowed money through credit lines (43 percent) or through the Paycheck Protection Program (42 percent), and nearly half (42 percent), have reprioritized their cash and liquidity needs, while 10 percent have considered or have filed for bankruptcy, and another 10 percent have permanently closed.
Only 8 percent said they have not been impacted by the pandemic.
The pandemic also has prompted C-Suite executives to take a greater interest in DB plan management, and plan managers say they are taking a variety of steps to weather the pandemic, including borrowing money to fund pension deficits (40 percent), restricting benefit payment options like lump sums to prevent impacts to funded status (35 percent), decreasing or calling back planned contributions (22 percent), increasing contributions (19 percent), triggering a partial plan termination due to layoffs (15 percent), and freezing or closing plans (6 percent).
Just over half of plan sponsors said they have taken advantage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act funding deadline extension until January 1, 2021, and an additional 39 percent said they intend to.
Plan sponsors also expressed interest in other potential relief measures including extensions of interest rate stabilization provisions and changes to Pension Benefit Guaranty Corporation (PBGC) premiums.
Market volatility is driving interest in pension risk transfer activity for more than half of DB plan sponsors surveyed, while 39 percent were considering transferring because of an increase in the volume of retirees (39 percent) and mortality changes due to COVID-19 (36 percent).
While COVID-19 has impacted annuity buyout activity this year, respondents said they do not expect this to be a long-term trend. Buyout activity has already begun to pick up and end-of-year activity is expected to be strong, said the report.
Those polled were equally split among using an annuity buyout (34 percent), annuity buy-in (34 percent) or a lump sun (33 percent) when de-risking their plans.
Twenty-two percent of plan sponsors who are planning to secure an annuity buyout are doing so to terminate a plan, while 60 percent are looking for a retiree lift-out, according to the survey.
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.
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