What to do about pensions is coming back as a hot topic for treasurers for 2018. Recent issues discussed at NeuGroup peer group meetings include de-risking the pension, improving pension asset-liability balances and freezing plans altogether.
At a NeuGroup Treasurers’ Group of Mega-Caps, one presenter detailed his company’s commitment to move away from equity and extend fixed income as its service cost as percentage of Projected Benefit Obligation (PBO) declines. The goal: to move fixed income allocation from 20% to 40%. Another member discussed waiting for interest rates to rise before further de-risking the company’s plan as it tries to determine how quickly to “move up glidepath.”
In terms of de-risking, “the fuse is lit,” according to one member in describing the move among companies looking at reducing defined benefit plan risk. This member says anticipation of higher interest rates is putting de-risking of pension plans front and center for many companies that still have them and want to reduce their exposure to risk and protect their credit ratings. Now’s the time to dig into the details of doing it.
Meanwhile, many companies are looking to get out of pensions. Some have tried the lump sum approach, but this has proved fruitless in most cases. “This drives me absolutely nuts…. nobody takes it!” Another suggested that anything the company is suggesting is seen with suspicion by some employees who assume that if management is pushing it, it must be disadvantageous for workers. Better education of participants and communication with them may help the cause.
Another route taken by MNCs is issue debt to fund their plans, converting a long-term liability, potentially impacted by changing mortality and interest rates, into a highly predictable exposure. But this route to be very expensive to buy those annuities. “It ties up a lot of cash, so in my opinion the most economical way is to let [the liability] run off,” according to a member of NeuGroup’s Treasurers’ Group of Thirty, although other factors can complicate the issue. He added his team anticipated his company’s pension would become fully funded within five years, based on expectations for interest rates and return on assets, but the company currently had insufficient capital to pursue issuing debt.
Ultimately, how much and how fast interest rates rise will play a key role in how aggressively members can pursue glidepaths that deemphasize equity and boost fixed income or de-risk. One tMega presenter’s slide on strategic issues said it comes down to “whether interest rate movements can solve funded status gap.” Another challenge involves “continued headwinds from low discount rates on lump sums,” referring to the rates used to calculate pension liabilities. The shift in rate expectations makes this the right time for companies with defined benefit plans to evaluate their options and put de-risking plans in motion.