Integrated Team, Proactive Approach

Transferring the risks associated with current and future pension liabilities to retirement plan participants or an insurance company ultimately reduces the plan’s impact on the balance sheet, income statement and contributions required with funded status volatility, along with reducing PBGC premiums. Implementing an appropriate de-risking strategy, however, requires numerous considerations and decisions.

USI Consulting Group’s (USICG) team of actuaries, annuity consultants and investment advisors work with clients to identify and evaluate the facts, objectives and considerations to ensure the appropriate de-risking strategies are implemented at the proper time. This level of financial coordination is not available through a siloed approach and this kind of proactive consulting by an integrated team can provide savings that exceed an individual de-risking strategy.

There is no standard best de-risking strategy, as each organization’s ideal solution is based on preferences, budget, timeline and risk tolerance. In fact, USICG’s experience indicates that retirement plan sponsors often select a combination of de-risking strategies designed by the actuary and investment consultant.

In some cases, annuity purchases and lump sum windows can be used to de-risk a pension plan as part of a “glide path to termination” strategy or a means to reduce a plan sponsor’s exposure to unfunded liability for an ongoing pension plan.

Plan sponsors should also consider liability-driven investing (LDI) to align their fixed income asset allocation with their pension plan liability. LDI can be used with an active pension plan to reduce contribution volatility or with a plan on a “glide path to termination” as a way to more predictably manage the unfunded liability.

  Plan Goals Should Guide Strategy

Identifying and implementing a de-risking approach that matches your organization’s objectives can lead to successfully:

• Decreasing Pension Benefit Guaranty Corporation (PBGC) premiums by reducing participant counts through annuity purchases and lump sum windows
• Reducing liability growth through lowering total plan liability
• Producing a more stable funding pattern by aligning fixed income assets with benefit liabilities through LDI
• Developing a predictable contribution strategy designed to achieve your plan goals through lower, more stable prospective costs

  De-risking Strategy Pays Off

Having a retirement consulting team that understands your organization’s de-risking objectives and applies its expertise can help you reach goals in a timely manner.

Case Study: Understanding De-risking Objectives and Implementing a Strategic Plan 

Recently, USICG helped a client develop and implement a strategic plan to terminate a pension plan which held $113 million in pension liability.

We established a glide path for the plan and alerted the client when it appeared they were close to being able to terminate the plan. Our team estimated that they were fully funded on a plan termination basis according to current rates, but there could be up to a $5 million contribution needed, depending on the final annuity contract pricing.

The estimated contribution was within their budget and they proceeded with the plan termination. The client locked in their asset gains by moving to cash. In addition, rising interest rates removed the possibility of underfunding.

USICG’s team also negotiated $1.1 million in savings on a $27 million annuity contract, resulting in the plan being $8 million overfunded when assets were distributed. We consulted with the client to craft a strategy to use those excess assets to fund a defined contribution plan.