Plan Sponsors: De-Risk Your Defined Benefit Pension Plan
De-risking a defined benefit pension plan can get complicated for plan sponsors who are trying to go it alone. But failing to de-risk your plan could create an unexpected impact on your balance sheet and income statement, causing financial uncertainty and increased anxiety, ultimately masking your organization’s true operating results. To help mitigate these financial risks, plan sponsors may want to consider various de-risking strategies.
There are many possible benefits for plan sponsors who de-risk their pension plans. Consider what might motivate your organization to take the first steps.
What’s pushing sponsors to de-risk their plans?
While there is a lot to consider before diving into the de-risking process, there are six motivating factors that are difficult to ignore.
- Actuarial risk. Forecasting annual pension contributions can be difficult, which adds considerable uncertainty to the organization’s annual budgeting process.
- Interest rate risk. Large balance sheet losses can occur when the present value of liabilities suddenly increases due to a drop in the discount rate.
- Market risk. If the trustees have allocated some portion of the plan’s assets towards equites, then large balance sheet losses can occur if there is a sharp drop in the stock market.
- Improved funded status. The funded status is likely to have recently improved due to the hikes in interest rates by the Federal Reserve.
- Longevity risk. The life expectancy of beneficiaries has increased, indicating that pension payments could last far longer than is currently anticipated.
- Increasing premiums. Plan sponsors of for-profit companies have seen large increases in their premium payments to the Pension Benefit Guaranty Corporation (PBGC).
Diving into the de-risking process can feel intimidating, but regardless of where you’re at, CLA can help you plan for, understand, and implement a de-risking strategy.Download the White Paper