NEPC: FUNDED STATUS IMPROVES FOR CORPORATE AND HEALTHCARE DEFINED BENEFIT PLANS
Survey of Plan Sponsors Shows:
- Majority of Plan Sponsors Find Ways to Hedge Against Premium Increases
- Popularity of Lump-Sum Payouts and Other Liability Reduction Strategies Wanes
- More than Half of Plan Sponsors are Bullish on the Stock Market for the Next 12 Months
BOSTON, October 24, 2017 – NEPC, LLC, one of the industry’s largest independent, full-service investment consulting firms, today announced the results of the 2017 Defined Benefit Plan Trends Survey, a gauge of plan sponsors’ strategic vision for their pension funds.
The most notable survey finding this year is the increase in over-funded plans, with nearly one in five (19%) respondents reporting a funded status of more than 101%. This is a 10% increase from 2016, making it the highest funded status since the survey’s inaugural year in 2011. Of these plans, 65% invest in alternatives and 55% use liability-driven investment strategies, with a majority of users implementing with derivatives. The rising of variable rate premiums, implemented by the Pension Benefit Guaranty Corporation (PBGC), also had a strong influence on the improved funded status as a quarter of plan sponsors were considering additional contributions in the 2016 survey.
Plan sponsors have also been more open to reviewing and changing their glide paths. A majority (70%), formally reviewed their glide path in 2017. Of those 70%, 35% implemented a change by modifying future trigger points, and 12% re-risked the portfolio.
“The PBGC rate premium decision has had a major and lasting impact on plan sponsors and their strategies,” said Brad Smith, partner in NEPC’s Corporate Practice. “Not only have we seen an increase in over-funded plans to help hedge against these premiums, we’re also seeing plans accelerate the de-risking process and move down the glide path more quickly. With so much at stake, we don’t expect plan sponsors’ anxiety toward rate premium increases to subside.”
The use of liability reduction strategies decreased this year by 12% to 75%. In 2016, 87% of plan sponsors considered or implemented lump-sum payouts, the most popular choice. The liability reduction decrease is likely a result of plans having issued them and seeing diminishing returns. When asked if they’d consider lump-sum payouts over the next six months, only 22% of plan sponsors answered, “yes.”
PBGC rate premium increases continue to shape plan sponsor behavior when deciding how to de-risk portfolios. Eighty percent of plan sponsors indicated that they will make changes to their plan strategy in the next six months. Of those who said they would make a change, higher contributions (24%) and partial risk transfer (34%) are the preferred strategies.
As plan sponsors learn from the past and begin hedging against unpredictable markets, their optimism continues to grow. Fifty-six percent of respondents are bullish on the stock market in the next 12 months, up from 51% in 2016.
NEPC will be hosting a webinar on Thursday, November 2 to present the full survey findings. Click here to register.
To download the DB Trends Survey infographic, click here.
A quarter of the 2017 Defined Benefit Plan Trends Survey respondents represent healthcare organizations. Please see below for a healthcare survey subset, highlighting the industry’s use of DB strategies and their market outlook.
To download the Healthcare Highlights infographic, click here.
About the Survey
The 2017 NEPC survey was conducted online by the Corporate Defined Benefit Practice Group in August 2017. The survey captures 143 plan sponsors’ views, including a number of NEPC clients representing approximately $169 billion in defined benefit assets. The median plan assets among respondents was $750 million and the average plan assets was $1.2 billion. Copyright is held by NEPC.
About NEPC, LLC
NEPC® is an independent, full-service investment consulting firm, providing asset allocation, manager search, performance evaluation, and investment policy services. We work with discerning investors on both an advisory and discretionary basis. We service 355 retainer relationships1, representing assets of $984 billion with approximately $54 billion in alternative assets, from our offices in Boston, Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Portland and San Francisco. We encourage your comments and feedback, as well as any inquiries you may have about our firm or our consulting services. Learn more at http://www.nepc.com/focus-areas/corporate.
statistics as of 06/30/17
Please note that all investments carry some level of risk. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Please contact NEPC for current information about our views of the economy and the markets. Past performance is no guarantee of future results.