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Defined Benefit Plan Resolution Consulting

Frozen Defined Benefit Pension Plans are Risky, Expensive and Burdensome

THE PROBLEM

An increasing number of companies have been attempting to reduce costs and mitigate risk by freezing their defined benefit (DB) plans. Ironically, the costs and risks associated with these frozen defined benefit plans continue to grow, draining valuable financial and human resources from an organization that might otherwise be directed to productive uses. Treading water is rarely an intelligent means to an end. And, in the case of frozen DB plans, such paralysis has been shown to significantly increase the exposure and costs resulting from:

Equity market volatility
Persistent low interest rates
Continually rising Pension Benefit Guaranty Corporation (PBGC) premiums
Longer life expectancies requiring the use of revised (higher cost) mortality tables
Ongoing administrative and compliance burdens

While it is difficult to quantify the adverse impact of diverting time, energy and money to a frozen DB plan, most executives would agree that eliminating the distractions and unnecessary expenses associated with them will have an outsized positive affect.

THE SOLUTION

Defined Benefit Plan Resolution Program ("DBPRP"), incorporating pension risk transfer and plan termination, is the ultimate de-risking strategy which eliminates all risk for plan sponsors. For years, plan sponsors have been waiting for interest rates to go up, hoping that the cost of plan termination will then go down. Certainly, higher interest rates favorably impact the cost of benefits and therefore, the funded status of a plan. However, there are several other factors that impact the cost of benefits and the funded status of a plan, many that function in reverse correlation to interest rates, potentially wiping out the advantages of interest rate increases.

A COMPOUND QUESTION THAT PLAN SPONSORS SHOULD ASK:

Will the total reduction in cost due to possible interest rate increases be more or less than the total increase in cost due to:

Possible adverse impact (of interest rate increases) on investment performance, plus
Aging participant population, plus
Increasing longevity, plus
Ongoing administrative costs including increasing PBGC premiums/audit fees/actuarial fees/investment advisory services among others?

Many practitioners argue that the totality of the various factors and assumptions, including interest rate movement, is a net neutrality or corresponding offset. While that may well be the case, we believe it is important for plan sponsors to ask and frame the questions based on their facts, circumstances (including tolerance for risk, business conditions, etc.) and suitable assumptions. Only then can a realistic and business-smart pension risk transfer and exit strategy be successfully developed, implemented and completed.

WHAT WE DO & HOW WE DO IT

The DBPRP is designed to relieve plan sponsors of the risk, expense and fiduciary responsibility associated with maintaining a frozen DB plan, as quickly and efficiently as possible. There are numerous issues to consider when developing the optimum approach to DBPRP. CohnReznick Benefits Consultants' experienced team of client-centric pension and risk consultants work with you to identify and evaluate the facts, objectives and considerations that need to be fully addressed within the PRP pension de-risking process. We develop customized solutions to reduce and ultimately eliminate:

Administrative costs and burdens on HR and Finance
Headaches associated with managing a plan's funded status
Adverse effects of continued low interest rate environment
Requirements associated with the ever-changing regulatory landscape
Adverse financial impact of increasing PBGC premiums
Volatility and unpredictability of future contribution requirements
The escalation of plan liabilities due to continued mortality improvements

DO YOU HAVE AN EXIT STRATEGY?

How do you know when or how to begin the pension de-risking process? Are you better off waiting? What's the most efficient and least disruptive path to DBPRP?
Frozen DB plans remain because plan sponsors assume the economic and collateral cost of ending it is greater than the cost of maintaining the status quo. Is that a correct assumption?
There are generally several (often competing) considerations that determine the answer to that question, as well as the path and timing of DBPRP. That said, it is important to know because either way, one path must be more efficient, effective and less disruptive than the other.
Have you examined the alternatives, costs and benefits of a Defined Benefit Plan Resolution Program (DBPRP) including risk transfer and plan termination?

Contact one of our Retirement Plan Services Consultants to learn more about CRBC's DB Plan Resolution Program at derisking@cohnreznickbenefits.com or 516-683-6100.