The pension risk-transfer mechanism is popular in the U.K. but just starting to gain traction in the United States.
By Wayne Daniel|December 04, 2014 at 06:39 AM
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Most corporate treasurers are all too aware of the investment losses their pension plans suffered in the global financial crisis, and of the connection between those losses and a shift in attitude toward pension risk. In 2008, after two decades of reliable investment gains, many plans were overfunded and plan sponsors didn’t have to worry much about their asset/liability mix. However, as the financial crisis materially impacted the funded status of most large defined-benefit (DB) pension plans, plan sponsors became much more aware of their liabilities, and many began considering pension risk-transfer strategies. Although most corporate pension plans’ funded status has rebounded, few plan sponsors have shifted back to the carefree mentality of the 1990s.
The combined effects of the sustained low-interest-rate environment, market uncertainty, regulatory changes, planned increases in Pension Benefit Guaranty Corporation (PBGC) premiums, and recent changes in mortality assumptions from the Society of Actuaries (SOA) are prompting most plan sponsors to spend more time evaluating their plan’s investment performance relative to its liabilities. As a result, increasing numbers of companies are shifting to an investment approach focused on balancing assets and liabilities, and some are employing pension risk-transfer strategies to more fully mitigate their liabilities.
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