Pension funding concerns ... and solutions

Karen McColl

By Karen R. McColl, CFA
Head of Defined Benefit Pensions for Institutional Solutions at Massachusetts Mutual Life Insurance Co. (MassMutual).
Posted on Apr 14, 2020

In the throes of the COVID-19 pandemic, we are moved by the willingness of people to adapt their daily lives for the greater common good. As we are realigning our routines to mitigate health risks on ourselves and our communities, we are also working to mitigate risks for our businesses partners.

Before the outbreak, the MassMutual Defined Benefit Plan Risk Study, which focuses on sponsors’ pension risk confidence, knowledge, and solution options, finds 80 percent of defined benefit plan sponsors are concerned about “funding risk” (their ability to fund the plan), and 77 percent are concerned about the impact of investment losses on their company’s bottom line, and rightfully so.

While 56 percent of plan sponsors were under the impression they have sufficient assets to cover the plan’s liabilities, the same group reported funded status levels that did not support that belief. Specifically, only 23 percent indicated a funded status of 90 percent or more at the time of the survey. No doubt, these funding concerns and positions have been exacerbated by recent market events.

While underfunding and investment losses can create serious financial impacts for plan sponsors, the good news is that sponsors value pension consulting expertise, and effective solutions are available. More than four in five sponsors indicated they highly value services provided by advisors and nearly all placed similarly high value on investment and actuarial consulting services.

Together financial advisors and MassMutual can provide sponsors with remedies aimed at improving the health of their pension plan financials and the impact on the employer’s balance sheet. Hedging techniques, such as a liability driven investment (LDI) approach that aligns the duration of a plan’s assets to its liabilities, can mitigate risk and bolster a plan sponsor’s ability to meet future pension obligations –even when confronted with adverse market conditions. Additional risk management solutions include plan design options such as freezing the plan, lump sum window projects for a select group of terminated employees, and pension risk transfer.

Please view our full report to learn more about sponsor pension risk confidence and concerns, and how, together, pension advisors and MassMutual can offer solutions.