Among companies that continue to offer defined benefit retirement plans, shedding the risks associated with those plans has rapidly become a strategic objective. As company-sponsored pension plans have gotten better funded companies have focused on reducing pension risk.
The data comes from research conducted by Mercer Investment Consulting and CFO Research and the results were published on Thursday. According to the research, aggregate funded status of pension plans at companies in the S&P 1500 stood at 86% in May of this year, well above the all-time low of 70% in July of 2012.
Half of the survey’s respondents have adopted fixed-income investment plans that sync up with the duration of pension-plan liabilities. More than 40% of respondents said their company shifts assets to lower-risk categories as the funding status of pension plans improves and a similar number have started allocating more of their funds to more stable fixed-income investments.
Far fewer — only 14% — have purchased annuities that transfer liabilities to a third party, but Mercer believes that the success of risk-transfer programs such as those undertaken in 2012 by Ford Motor Co. (NYSE: F), General Motors Co. (NYSE: GM), and Verizon Communications Inc. (NYSE: VZ) will encourage others to look closely at lump-sum distributions or purchasing annuities. A third of respondents said they are very likely/somewhat likely/will consider dumping defined benefit plans.
Transferring pension risk to a third party faces some headwinds though. Nearly 80% of respondents cited low interest rates as disincentive to either lump-sum distributions or annuity purchases. And while giant companies like Ford, GM, and Verizon have the heft to pursue these options, nearly half the survey respondents said that financial markets aren’t interested in accepting risks from companies their size.
Shutting down defined benefits plans remains popular, however. In 2011, 59% of respondents had closed or frozen their defined benefits plans; another 45% did so between 2011 and 2013. And 6% more say they are “very likely” to close their defined-benefits plans within 2 years.