The authors explain why companies with well-funded plans should take bold steps to de-risk now.
2013 was a year of historic improvement in pension funded status, particularly for those plans with high equity exposure. Specific financial market conditions – including an increase in interest rates for long-duration corporate bonds and a rise in equity markets – occurred to enhance the funded status of the typical defined benefit (DB) plan. Accordingly, the funded status of the 100 largest U.S. corporate DB pension plans improved to 88% as of year-end 2013.
Nevertheless, history remains unkind to plan sponsors around the globe. Consider this: twice in the past 13 years, U.S. corporate pensions have lost over 30% of funded status in market downturns. Sponsors in the Financial Times Stock Exchange 350 (FTSE 350) also experienced declines, having lost over 25% in funded status during the financial crisis.
Despite significant funded-status improvements, some companies may be further deferring potential de-risking actions, such as implementing liability driven investing (LDI) strategies combined with longevity protection or purchasing a buy-out or buy-in. These sponsors may be misjudging the risk they are taking, however, because relying on improvements in market conditions to close funding gaps is precarious, given that equities and interest rates are volatile.
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