Plan Sponsors Look to Offload Pension Risks

Volatility in equity markets, fluctuating interest rates, and the simple fact that people are living longer all contribute to greater risks and a more difficult management challenge for defined benefit plan sponsors. These risks are prompting some sponsors to consider a buyout of their defined benefit plan liabilities by a third party, typically an insurer. Mercer’s Pension Buyout Index, published monthly for the US and UK markets, allows plan sponsors to see at a glance the relative cost of a buyout and how that cost changes over time.
“In order for plan sponsors to make the best decision, they should compare the current cost of risk transfer through annuitization with the total cost of retaining pension obligations on the balance sheet,” says Sean Brennan, a Principal in the Financial Strategy Group of Mercer’s Investments business. “Sponsors that opt to transfer the liabilities associated with a defined benefit plan then have several options, including a full buyout, a partial buyout, or a buy-in.”
Because pension risk management strategies can have a material impact on key corporate financial metrics and participant security, plan sponsors should be well informed when exploring their options, he notes.

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