Ready 2012 Pension Pulse Survey






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Ready 2012

Pension Pulse Survey


As a result of increasing press regarding both the number of pension plans that have eliminated their retirement plan’s benefit accruals to all or a portion of their workers and the degree to which those companies have put in place policies, programs, or plan changes to avoid, eliminate, or mitigate risk, Aon Consulting undertook a survey of companies with frozen defined benefit (DB) pension plans in January of 2009 to address these questions. Some questions dealt only with plans in which no participants accrued any benefits (“hard frozen” or simply “frozen” plans) and some dealt with plans closed to participants that did not meet certain age and service requirements (generally new entrants), often called “soft frozen” plans. About 70 companies with more than 100 frozen DB plans responded to the survey, with companies representing all regions of the country, and with frozen plans (as measured by assets) ranging in size from less than $25 million to more than $10 billion.


Key Findings

• Companies with multiple plans tend to freeze them all in a similar manner the majority of the time. When they don’t, the less affected plans tend to be union-negotiated plans.

• Most companies are investing the assets of their frozen plans in the same manner that they did before the plan freeze. Many of the companies noted that they have

investigated the level of risk that the pension plan generates, and deemed as

“acceptable” the risk the current frozen benefits, cash funding strategy, and investment model generates. The majority also noted that they intend to change at least their investment structure in the future, however.

• Most companies with hard frozen plans would like to terminate them in the near future. Unacceptable financial volatility and contribution requirements were the primary reasons for this. A lack of current assets, and a lack of a plan as to how to achieve the necessary funding with an acceptable level of risk stops the majority of the sponsors from doing so today.

• While a significant minority of plans with soft freezes in effect intend to continue to operate their plans for the foreseeable future, most are considering changes due to the cost and volatility of retaining even their soft frozen plans.

• Most employers (more than 75%) contemplating a plan termination within the next five years intend to use multiple vendors, as they believe the potential cost savings and efficiencies generated by utilizing only one vendor are much less important that the expertise, specialization, and fiduciarily prudent behavior generated by using multiple vendors.


Our View

• Companies need to make certain that they understand the risks that their retirement plans generate for the corporation and its shareholders, and have the benefit design, contribution policy, and investment policy all reflect that level of risk. For many companies, this will mean a change from the historical investment paradigm, as noted in the result that showed that most frozen plan sponsors intend to change their investment policy in the future. Aon believes that the time to review the investment policy and, if the desire is to terminate the pension plan within the next five years, to develop an investment policy that recognizes this termination strategy, is now. • Once a plan has been frozen, it loses its HR value – the attraction and retention of the workforce and the ability to effectively manage the workforce. The plan now becomes a debt of the organization that can bring substantial risk (asset as well as compliance risk) to the organization. This risk needs to be understood and addressed. For many

organizations, the plan should be de-risked over time and potentially terminated at an appropriate time. Review of the risk will typically generate very different approaches to asset allocation and plan management than had been in use prior to the review. • Aon believes that plan sponsors should make certain that their goals and desires are understood by their consultants, and that any potential conflicts of interest are addressed before termination strategies are set. A preliminary review of the potential vendors available to assist with a termination and a clear discussion of the goals of the plan sponsor will benefit everyone involved in the process.

• Aon recommends that companies considering the freezing or termination of their DB pension plan consider appropriate communications in order to control the message and reaction of the employees. Additionally, consideration of changes to other plans as a result of a plan freeze or termination (potentially including DC plans, severance plans, and retention plans) may be appropriate as well.

• While it is true that a significant number of companies have frozen their DB plans within the past three years, the majority of plan sponsors retained their plans without a freeze. Aon believes that defined benefit plans still provide real value to many employers and the choice of whether or not to retain or freeze the plan should be based on whether or not the plan meets sponsor and employee needs, and whether or not its risks can be acceptably addressed.


Detailed Survey Results

The majority of the companies that responded to our survey had a least one hard frozen plan (defined as a plan in which benefit accruals are frozen for all participants). Of the 66 companies that responded to our survey that had frozen plans, 48 of them (or 73%) had at least one hard frozen pension plan. While a number of the companies in the survey reported having both hard and soft frozen plans (defined as a plan in which eligibility to participate has been limited, generally not including employees hired after a specific date), unless the company operated a union-negotiated plan, it tended to freeze all its plans using a similar methodology.

Not surprisingly, more than one quarter of the plan sponsors of hard frozen plans were contemplating the termination of their plan, a much larger percentage than was reported by soft frozen or ongoing plans. When removing union-negotiated plans from the mix, the percentage grew to more than one-third of the hard frozen plans looking to terminate. When companies were asked, for non-union plans, why they were looking to terminate their hard frozen plans, or terminate or hard freeze their soft frozen plans, the reasons provided in order were that (1) the volatility was unacceptable, (2) the plan’s cost is too great, (3) administrative time and expenses are too great, and tied for (4th and 5th) employees don’t appreciated the plan and the firm doesn’t want employees working side by side with different benefits.

Survey Repospondents' Plan Status

Hard Frozen Plans Only


Soft Frozen Plans Only


Ongoing, Hard and Frozen Plan Combinations

8% 0 2 4 6 8 10 12


Amongst the union–negotiated plans, employers retained the plan in about equal numbers because they were happy with the plan, or because they were forced to do so as a result of their contract.

In response to recent events that have highlighted the risks associated with a defined benefit pension plan, we asked companies what changes they have made to the plan’s design, investments, or cash contribution strategy since they froze their plan. Two-thirds reported that they had determined that no changes were necessary as the risk was acceptable, or that a number of ideas had been investigated, but no changes had been made. More than a quarter noted that they had changed their cash funding or investment strategy.

We noted that future cash contributions were increasing for many plans, and asked where the money for these would come from. For most companies, contributions would be generated by internal returns or from existing cash. For a minority, contributions would not be necessary due to the fully funded status of the plan, but for a significant minority, the company would have to generate funds by cutting from the business or borrowing funds, or they would be forced to seek a funding waiver. Where the company expected to cut from the business, the hiring of new employees was the most chosen area of known cuts, although the majority had not yet determined where the cuts would come from.

Plan Sponsor Actions in Reponse to Risk Since Plan Freeze

No changes to plan design, investments, or funding determined, but investigations continue


Cash funding strategy changed due to risk

13% 3%

Benefits changed due to risk No changes to plan design, investments, or funding required as the risk is acceptable




Investment strategy changed due to risk


How Will The Pension Plan Contribution Requirement Be Met?

Cuts from business


Well funded, so no contributions


Seek a funding waiver


Borrow funds


Internally generated cash


We asked companies about their current investment philosophy, and about their potential future changes to those policies. The overwhelming majority are still invested in a traditional investment mix (60/30/10), while the combination of hedging interest rates, using swaps, or investing more than 40% in bonds are strategies utilized by less than one third of the companies that participated in the study. This paradigm changed dramatically when we looked at expected future investment strategies. Less than 5% of sponsors thought they would continue to employ the 60/30/10 standard investment strategy. Instead, most sponsors are looking to use swaps and other options, increase their fixed income weightings to partially immunize, or to change to an investment strategy that reflects the shorter investment horizon associated with their upcoming termination. Another change to the future probable investment strategy was to increase the equity mix, in an effort to “earn the way back to an acceptable funded status.”

Pension Plan Contributions Funded by the Following Cuts

Unknown 45% R&D 5% Future Hiring 30% Marketing 12% Training 8%

Expected Future Investment Strategy Basis & Components

Use of Swaps and Derivatives


LDI approach


Higher than 30% bonds to partially immunize


Standard (60/30/10)


Current Investment Strategy Basis & Components

Stantard (60/30/10)


Use of higher than 60% equity allocation


Reflection of short term horizon to termination


Higher than 30% bonds to partially immunize


LDI approach


Use of Swaps and Derivatives


While swaps and derivatives were chosen by a number of plan sponsors as a likely future investment vehicle to address investment needs, the use of swaps, derivatives, and option collars were specifically not allowed in a significant minority of the plans that we surveyed, for both current and future usage. On the other hand, the use of dynamic investment strategies, such as increasing the percentage of the assets invested in bonds as the funding status grows, when bond yields are high, or over time, was under study by more than half the companies that were investigating potential investment changes.

We surveyed companies regarding their future plans. More than half admitted that they expected no change in the plan’s status in the near future (whether soft or hard frozen), but would like to terminate the plan in the future. The majority of these sponsors admitted that they either had no strategy likely to get them fully funded on a termination basis in the near term, and/or that they didn’t have the necessary assets to accomplish this in that timeframe.

If and when the plan is terminated, most expected to use multiple vendors to accomplish this.

Employers understand that a plan termination involves a series of complex steps, and that there are advantages and disadvantages to using one vendor, or a number of different vendors. For those plan sponsors that intended to use only one vendor, cost savings and efficiency were the two primary reasons provided to use a single vendor for actuarial, annuity selection, investment, and the other needs associated with plan termination. By comparison, most sponsors choosing to use multiple vendors named fiduciary concerns as the primary rationale for using multiple vendors, with knowledge/experience secondary, and price tertiary.

Use a single vendor


Use multiple vendors



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