Thursday, November 01, 2012

What is pension de-risking?

GM moonshot has completed. Other pension de-risking projects are on the rise. What is penison de-risking? In short it is to pay lump sum to participants so that the company no longer has the pension liability on their books.

What are the benefits to the companies?
  • Demographic trend is that people are living longer. This means companies are on the hook to pay annuity to pension participants longer. Paying lump sum today will release companies future surprise on their obligation to pay
  • The world is deleveraging. High government debt in US, Japan, and several big European countries means that austerity policies will be prevalent around the world. This points to slow economic growth and low interest rate. Low interest rate increases a company's pension liability. Slow economic growth diminishes a company's pension asset return. Many companies have taken the view that taking pension liabilities off their book is good for the company's financial future.
  • PBGC premium is rising due to high government debt and potentially higher risk of company failure due to the slow economic growth. De-risking reduces the premium to be paid.
How do participants take these company derisking effort? From the numbers I see majority of the participants take a lump sum. Less than 30% of the participants take annuity. I also hear some employees take this as a company betrayal to them, making their retirement less secure.

Is this trend spreading to public pension plans?

Anyway, DC is the trend of future retirement. DB is definitely dying. Everyone now has a stake in the financial market, be it stock or bonds, there is no escape. Succeesful investment becomes more and more important for everyone. Financial advisors are probably going to see strong demand for their services in the next decade.

"Guaranteed income is the top thing that people are looking for in their investments, and they'll take that over a rate of return. Going forward, annuities will become even more mainstream." --Cathy Weatherford, chief executive of the Insured Retirement Institute"

No comments: