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Plan Sponsor Alert: Revisiting De-Risking Options
James Quaid

Thanks to better returns and an uptick in discount rates used to value plan liabilities, defined benefit plans’ funding statuses have improved to some of their highest levels since the Great Recession. Many plan sponsors are eager to preserve these gains and want to take risk off their balance sheet by implementing “de-risking strategies.” Because of the recent changes in funding levels and the various de-risking methods at their disposal, plan sponsors should use this opportunity to re-examine their current approach to best fit their goals for their plan(s) and their participants.

Determining the right de-risking strategy

Although you may have read about de-risking in the past, the current environment and appetite for de-risking has changed significantly over the past few years. The de-risking activity saw a brief slowdown before the COVID-19 pandemic, but nearly all plan sponsors responding to MetLife’s 2021 Pension Transfer Risk poll said that they intend to completely divest their companies’ pension liabilities in the future.

When considering a de-risking strategy, plan sponsors should first review the plan’s goals and study what drives the need to de-risk. It is important to consult with advisors to determine how assets and liabilities can be controlled — and at what price. Next, plan sponsors should look at the various available options. Out-of-plan approaches include lump-sum payouts, annuity buy-outs and full plan terminations. In-plan methods include liability-driven investments (LDI), in-plan annuities, and freezing plan benefits or freezing the plan to new participants.

Buy-out products, like annuities, transfer some or all of the pension liabilities to an insurer and reduce the overall risk to the plan sponsor. U.S. corporate pension plan buy-outs soared to $34.2 billion in 2021, up 37% from 2020, and their highest level since 2012, according to a LIMRA Secure Retirement Institute study released in March 2022. LIMRA found that 47% of plan sponsors are very interested in a buy-out deal in the future. Complete termination of a pension plan usually involves a combination of paying lump sums to participants and purchasing annuity products.

Buy-in products are also usually annuity products. But instead of completely transferring the pension liabilities to an insurer, the plan invests in annuity products that offer more stable returns and lower the risk of investment downturns.

Liability-Driven Investing (LDI)
Buy-outs can be an expensive solution for many plan sponsors, so a more attractive approach may be liability-driven investing — investment strategies to make the underfunding in a pension more predictable. These strategies are intended to reduce the effects of market downturns; however, they can also dampen the benefits of market gains. Many plan sponsors already have some kind of LDI strategy in place, but recent changes in the market and rising interest rates may require plans to take a second look at how these factors have altered their course.

A strong LDI approach should create a customized asset allocation that matches the current and future liabilities of a pension plan. But some factors are beyond a plan sponsor’s control. The war in Ukraine, rising gas and commodity prices, and lower expected returns on investments are examples of new variables to consider in just the first few months of this year. Plan sponsors may need to reach outside their existing LDI toolkit for other ways to stabilize the balance between assets and liabilities. Plan sponsors should look for a customized approach that fits the needs of their plan.

COVID-19’s impacts on mortality tables

A recent Milliman study found that between March and December 2020, total deaths were 21% higher than expected, and 80% of the increase may be attributed directly to the pandemic. It is still too early to tell whether the pandemic will impact the future of mortality tables used to determine liabilities, but plan sponsors whose workforces have been significantly affected should consult with their actuary to determine whether accommodations should be made. 

Find the best approach to fit your plan and its participants

A defined benefit plan’s unfunded liability may be the biggest risk on a company’s balance sheet. When it comes to de-risking strategies, every situation is unique and there is no one-size-fits-all strategy. Making these decisions takes careful consideration. Your plan’s actuary can help sift through the available options to help you determine which de-risking approach best suits your plan’s specific situation.

For more information, contact James Quaid at [email protected], or call him at 312.670.7444. Visit to learn more about our Employee Benefit Plans Services.

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