Pension plans are cautious about making plan changes, despite the improved economy following the pandemic, according to a survey by Mercer and CFO Research. The report is based on responses from 201 senior finance executives at firms with $500 million or more in annual revenue.
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“2020 proved to be a true stress test for defined benefit plans, as COVID-19 created disruptions in financial markets and corporate balance sheets. However, it also created opportunities for sponsors with a strategy to improve their financial position, and many took advantage,” Matt McDaniel, a partner in the US Financial Strategy Group at Mercer, said in a statement.
McDaniel added that the pandemic reiterated the importance of “good strategy,” and encouraged them to seek “both the right tools and counsel to navigate funding policy, risk transfer activity and investment portfolio management.”
About a third of respondents said they were taking advantage of relief in the American Rescue Plan Act to change funding thresholds to avoid benefit restrictions or participant notices, but only 15% expect to speed up the time frame to fully fund the plan.
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“Funding flexibility in pensions allows companies to keep that liquidity in-house so that they can reinvest those funds back into their workforce and business through this turbulent period. Most companies on the whole still have more work to do in shoring up their DB plans, and the funding relief in the new legislation provides more discretion on the pace and time horizon of getting there,” according to Tony Wagman, partner in DB consulting at Mercer.
Transferring risk is a key priority for plan providers, the report found. Ninety percent said they had offered participants lump-sum features to transfer risk within the decade, and 77% were considering offering additional lump-sum benefits in the next two years.
Seventy percent of respondents said they’re using annuitization to transfer benefits, while 77% expect to do so this year or next.
Over two-thirds of respondents said they struggle to make plan changes on schedule, leading to increased outsourcing of investment strategy and execution, according to the report. Over 70% of respondents have outsourced this function to a chief investment officer to some extent.
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In spite of pension plans’ struggle with risk and governance, the most common investment change made last year was to introduce alternative investments to the plan. The report noted that pensions have avoided alts for the most part over liquidity and fiduciary concerns, but half of respondents have incorporated private assets, and 40% have made them a core part of their lineup.
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