NEPC announced results of 2016 Defined Benefit Plan Trends Survey

November 30, 2016

NEPC Survey: Nearly Half of America’s Corporate Pensions Consider Lump-Sum Payouts

NEPC's 2016 Defined Benefit Plan Trends Survey Webinar replay to learn more about the findings.

  • Critical Need for Liability-Driven Investing and Popularity of Lump Sum Payouts Remain Among Top Risk Reduction Strategies for Defined Benefit Plans into 2016
  • 42% of Plans Were Frozen Versus 36% in 2015
  • 51% of Plan Sponsors Are Bullish on the Equities Market

BOSTON--(BUSINESS WIRE)--NEPC LLC, one of the industry’s largest independent, full-service investment consulting firms, today announced the results of the 2016 Defined Benefit Plan Trends Survey, a gauge of corporate plan sponsors’ strategic vision for their pension funds.

The most impactful year over year change observed relates to U.S. lawmakers’ move to increase the variable rate premiums via its Pension Benefit Guaranty Corporation (PBGC), which caused 45% of plan sponsors to consider lump-sum payouts for their plan participants. The rate per participant is expected to increase again in 2017. For those plan sponsors considering other risk reduction measures, 27% said they plan to issue annuities, while 25% of plan sponsors consider higher contributions. Thirty-nine percent of respondents aren’t planning any changes at this time.

Furthermore, as was the case last year, plan sponsors across industries are feeling the impact of longevity improvements released by the Society of Actuaries in an updated mortality table. As expected, projections show that plan participants living longer had a significant negative impact on plans’ funded status.

In 2016, the number of defined benefit plans with a funded status less than 80% increased to 28%, from 21% in 2015. Forty-three percent of plans have a funded status of at leaset 90%.

NEPC will discuss the results in a webinar at 2 p.m. ET on Thursday, Dec. 1. Register here to attend.

“The real game changer was what occurred at the end of last year with the PBGC rate premium decision, and plan sponsors have been scrambling on what to do ever since,” said Brad Smith, Partner in NEPC’s Corporate Practice. “Our expectation is that this anxiety about the rate premiums will continue, regardless of who’s in the White House. We continue to advise clients on best approaches to improve or maintain their funded status in a low-yield environment, even with a slight rate increase expected before the end of the year.”

The results show again this year that while a majority of plan sponsors (69%) are hedging interest rate exposure using Liability Driven Investing (LDI) strategies, many are also taking action to reduce the absolute size of the sponsor’s pension liability by offering lump sum distributions to participants. The 38% of plans not pursuing LDI say they are waiting for interest rates to rise (34%) or are maintaining a total return approach as the plan remains open (29%).

LDI continues to be an important tool for plan sponsors seeking risk management solutions. As such, allocations to LDI investment strategies have continued to increase. In the past six years, plan sponsors using LDI have materially increased their LDI allocations – 36% have an allocation greater than 50% or more today, versus nine percent in 2011.

Among the LDI strategies that continue to gain popularity, Treasury STRIPs and other zero-coupon bonds stand out. Forty-five percent of funds that allocate to LDI invest in these products, versus just 10% in 2012. Long-duration government/credit bonds are the most popular LDI investment, with 62% of LDI investors using them today versus 46% in 2012.

Lastly, alternative investment strategies still remain in favor, with 79% of respondents expecting to maintain their current allocation to private equity and hedge fund managers, among other opportunities. The results also show that of those plans invested in alternatives, 37% allocated between 10-25% and eight percent allocated between 25-50% of assets.

Other key findings:

  • 51% of plan sponsors have a bullish outlook on the stock market for the next 12 months, while 49% are bearish
  • Legislative/actuarial changes to liability valuations was the greatest concern followed by low interest rate and return environment
  • 34% of respondents considered issuing debt to improve funded status; 47% of these plans have a funded status of less than 80%
  • Double digit equity returns were not enough to stem the negative impact that lower discount rates had on pension plans

“The only lever plan sponsors have to pull is to try and shrink the size of their liability and many still stand pat,” said Smith. “If you look at this issue through the lens of the interest rates story, you’ll see that those plan sponsors who rejected an LDI approach as they waited for rates to rise, saw their DB plans suffer. And they’re still waiting for that entry point as equity markets continue to perform well.”

About the Survey

The 2016 NEPC survey was conducted online by the Corporate Defined Benefits Practice Group in August 2016. The survey captures 184 plan sponsors’ views, including a number of NEPC clients representing approximately $280 billion in defined benefit assets. Copyright is held by NEPC. For the full survey results, contact Matt Kirdahy at matt@w.group.


Water & Wall Group
Matthew Kirdahy, 212-343-2366

The online press release can be read here.



Topics: Corporate, News, Survey, Defined Benefit, Press Release

Read our disclaimers.