The times they are a changin’. Corporate pensions were king; however, additional means to save for retirement were developed and grew at the expense of their preeminence. But pension plans’ vitality is rebounding in some ways, and an expert panel recently discussed their pullback from the brink to being flush with cash.

Aon figures Matt Maloney, Senior Partner, U.S. Wealth Solutions Innovation Leader; Mark Tavares, Partner, Corporate Defined Benefit Solutions Leader; and Megan Nichols, Partner, Head of Pension Settlement Solutions, were among panelists in an April 9 webinar presented by Aon. Moderator Sandy McCoy, Partner, Corporate Defined Benefit Solutions Leader at Aon, led the discussion.

Times Change

In the aftermath of financial crises in the last 20 years, said Maloney, the funded position of pension plans “significantly deteriorated,” and “the regulatory landscape that was governing those plans shifted to recognition of the volatility to which they were subject.” The result, he said, was that companies “started aggressively moving away from providing those benefits to employees.”

“Corporate defined benefit plans were treated as a legacy,” said Maloney, “and were on the path of going away.”

But things changed. “A few changes have emerged which we see as making the shift into a new era,” said Maloney. He identified three factors that led to that sea change:

• • aggressive re-funding of pension plans, driven by Pension Benefit Guaranty Corporation (PBGC) premium rates and tax reform that motivated companies to make large, accelerated contributions;
  • a growing, robust pension risk transfer market; and
  • very favorable capital market developments.

Opportunity Knocks

The landscape for defined benefit plans is changing, and that spells the opportunity to pursue new options and take new approaches, panelists indicated.

One factor that affects strategic options concerning a pension plan, said Maloney, is funded status.

When a plan is underfunded, he said, the common focus is to:

• • develop a funding strategy;
  • align investment risk and tolerance of risk;
  • consider design changes;
  • clarify long-term objectives; and
  • clean up data.

But when a plan is fully funded, or nearly so, Maloney said, a long-term objective drives actions. This entails:

• • refining long-term objectives;
  • adjusting the portfolio and hedging to align with the endgame; and
  • executing partial settlements.

Plans have moved to 100% funding and more for a number of years now. And a surplus of funding in a pension plan is more than good financial news, panelists indicated. Having a surplus offers an employer the opportunity to adjust its strategy concerning its plan. Maloney offered some ideas:

• • if the goal is to maintain and modernize the plan, the strategy is to fund new or enhanced benefits and offset other expenditures;
  • if the goal is to shrink the plan, the strategy should entail accelerating risk transfer while fully hedging the remaining plan, building contribution buffers, and cleaning up data and administration; and
  • if the goal is to terminate the plan, the strategy for the surplus can entail sharing it with participants, transferring it to a replacement defined contribution plan, or returning the surplus to the plan sponsor.

Some don’t simply choose one of those three, however. “In practice, what we see is that some companies do a blend of these three that reflects their own needs, values, and priorities,” said Maloney.

There is a spectrum of ways to approach using a surplus, Maloney said. For instance, a company can pursue an approach that stresses annual spending, which entails replacing a match or half a match with a cash balance arrangement. Or a company can pursue lump-sum spending instead.

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