NEPC: Overfunded DB Plans Rise 10%

Survey finds 19% of defined benefit plans have a funded status higher than 101%.

The number of defined benefit pension plans reporting a funded status of more than 101% increased by 10% in 2017, according to a recent survey from investment consulting firm NEPC.

The NEPC’s 2017 Defined Benefit Plan Trends Survey reported that 19% of respondents were over-funded, which is up from 9% last year, and is at its highest level since the first survey was conducted in 2011. As a result, the percentage of plans surveyed who reported that they were funded less than 101% decreased to 81% from 91% last year.

The survey also found that among the over-funded plans, 65% invested in alternatives, and 55% used liability-driven investment strategies, with a majority of users implementing derivatives.

The NEPC said the rising variable rate premiums required by the Pension Benefit Guaranty Corporation (PBGC) had a significant influence on the improved funded status when deciding how to de-risk portfolios. Some 80% of plan sponsors said they will make changes to their plan strategy in the next six months, and of those who said they would, partial risk transfers (34%), and higher contributions (24%) were the preferred strategies named. The number of respondents saying they would seek partial risk transfers was up 15% from the 2016 survey, while the number of funds saying they would seek higher contributions increased by 5%.

“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. With so much at stake, we don’t expect plan sponsors’ anxiety toward rate premium increases to subside.”

The survey also said that the use of liability reduction strategies decreased 12% this year to 75%. In 2016, 87% of plan sponsors considered or implemented lump-sum payouts, the most popular choice. The NEPC said this decrease is likely a result of plans having seen diminishing returns from the payouts. When asked if they’d consider lump-sum payouts over the next six months, only 22% of plan sponsors said they would.

The NEPC survey was conducted online in August by the firm’s corporate defined benefits practice, which questioned 143 plan sponsors, including NEPC clients representing approximately $169 billon in defined benefit assets. The median plan assets among respondents was $750 million, and the average plan assets was $1.2 billion.

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