Just under half of companies with defined-benefit pension plans have plans that are active and open to new hires, according to a survey from investment manager SEI. Its poll of around 150 companies of various sizes shows 47% report having active plans, while 24% say their plans are closed to new entrants and 28% have plans that are frozen—closed to new entrants with participants not accruing benefits.
These numbers closely mirror SEI’s previous survey in January, which showed 46% of plans were active, 29% closed and 24% frozen. In both surveys, only 1%of companies were in the process of terminating their plans.
The availability of defined-benefit pensions has declined in recent years. In the early 2000s, about 60% of DB plans were still active. Jon Waite, director of institutional advice at SEI, says the erosion of defined- benefit pension plans may not be over, but plan sponsors may be rethinking their approach to the situation. In the past few years, pension sponsors have been spending more time on overall pension strategy, rather than making changes to their plans, he says.
“Plan sponsors have reached a point where they understand that closing or freezing the plan is not the panacea,” Waite says. “It is not going to solve their underfunding situation.”
General Motors took a more drastic approach to managing the risks involved in defined-benefit pensions when it announced recently that it will offer lump-sum buyouts to salaried retirees and transfer the management of its active pension plans for salaried retirees to Prudential Financial.
The company’s aim is to reduce the size of its overall pension assets and liabilities, Waite says. Because GM has a huge pension plan, “they may view it as they’re getting penalized for having the potential for so much volatility to their balance sheets coming from these pension plans,” he says, noting that if GM shrinks its pension plan, it should have less year-to-year volatility and a more stable balance sheet.
GM’s pension is larger than most companies’ plans, and the changes it is making are not a route the typical U.S. pension plan sponsor will want to take, Waite says. He notes that with U.S. interest rates so low, it’s expensive to offer lump sums and buy insurance contracts.
But many plan sponsors are still looking at how to manage their plans, evaluating their risk and de-risking plans when possible.
With interest rates low, companies increasingly are turning toward liability-driven investing (LDI), Waite says. “They’re looking at much more customized and complex interest-rate-hedging strategies within the pension, and what they’re also looking at is what the proper level of risk is today and going forward.”