“De-Risking” Private Sector Defined Benefit Pension Plans

Abstract

Recent recessions have caused a great deal of instability in defined benefit pension funding requirements. That has been exacerbated by the provisions of the Pension Reform Act of 2006, accounting and reporting changes and revised policies of credit rating bureaus. The result has been the shifting of large amounts of pension debt to corporate balance sheets. This has moved pension policy from the employment side of the house to the CFO. The response has been dubbed “de-risking.” It involves transferring longevity, investment and interest-rate risk from the sponsor to the participants through lump sum distributions and to an insurance company through the purchase of a group annuity contract. A related approach is to “immunize” the plan assets from instability by moving out of equities and into fixed-income bonds that duration match the plan’s liabilities. 2012 was a banner year for de-risking. It will continue in 2013. This article examines what may prove to be the death knell of traditional defined benefit pension plans in the private sector.