Friday, July 17, 2009

Employers Still Committed to Defined Benefit Plans

Despite recent financial turmoil, 71 percent of employers say they will focus on ensuring the long term viability of their defined benefit plans, according to a survey by CFO Research Services and Towers Perrin. The remaining 29 percent are focused on finding an alternative to their defined benefit plan. The steep downturn, however, has "qualified" employer commitment, as 51 percent also say they are more likely to seek an exit strategy from their defined benefit plan.

By Robert Stowe England
MindOverMarket.blogspot.com

July 17, 2009

The faith of 71 percent of private sector employers in the company’s traditional defined benefit plan may have been severely shaken, but it has not been broken, according to the results of a new survey.

For 29 percent of employers, however, the financial turmoil and recession have left them focused on finding an alternative retirement benefit for their employees in the coming years.

These findings are from a survey of 439 employers in the United States, Canada and the United Kingdom by CFO Research Services and Towers Perrin, who jointly released a report on their survey last week.

Their report on the study, titled "A Qualified Commitment to DB Plans," can be found at this link: http://www.towersperrin.com/tp/showdctmdoc.jsp?country=global&url=Master_Brand_2/USA/Press_Releases/2009/20090709/2009_07_09.htm

CFO is the sponsored research arm of CFO magazine, a publication for chief financial officers. Towers Perrin is an employee benefits consulting firm. For more information on CFO Research Services, visit this link: http://www.cfo.com/cfo_research/

The Web site for Towers Perrin can be found at this link: http://www.towersperrin.com/tp/lobby.jsp?country=global

While these findings appear to be broadly encouraging for the future of defined benefit plans in the private sector, the confidence of employers has clearly taken a hit.

For example, 43 percent of the long-termers said that recent financial market turmoil made them more likely or much more likely to seek a defined benefit plan exit strategy.

These compares with 72 percent of the respondents focused on finding alternatives to the defined benefit plan reporting that they were more likely or much more likely to seek an exit strategy from their defined benefit plan.

Employers in the United States (61 percent) and the United Kingdom (54 percent) are more likely to seek an exit from their defined benefit plan, while a majority of Canadians (54 percent) say there is no change in their exit strategy

In the United States, only 21 percent private sector employees have access to a defined benefit plan, while 20 percent participate in the plan. See Bureau of Labor Statistics detailed data on employee benefits at this link: http://www.bls.gov/ncs/ebs/sp/ebsm0004.pdf

American employers in the survey had a median loss of 25 percent of the value of the assets in their pension plans in 2008. By contrast, the Canadian employers had only an 11 percent loss, while the United Kingdom employers had 7 percent loss.

Given declines in corporate profits (and, in many cases losses) in the current recession, employers face greater constraints in making contributions to their defined benefit plans. Even so, 82 percent of U.S. employers in the survey do not expect to have any problems funding their plans. In Canada, 86 percent said no problem, while 62 percent in the U.K. said the same.

Support for spending on pension plan contributions among the employers who have long-term commitments was based on the ability of the defined benefit plan to give employees a secure retirement.

While the commitment shows up in the data, a clearer picture of employer views was found in comments made in follow-up interviews with several employers in the survey.

“A pension scheme is still the best,” said Graham Browne, pension manager at Barnardo’s, a U.K. children’s charity. “You’re still getting your tax relief, you’ve got the potential for a pension based on your earnings at or near retirement, and people forget that, all because of scare stories,” he added.

Funding Levels

The survey found that 34 percent of those committed to the long-term viability of their defined benefit plan would contribute enough to ensure full funding.

Another 22 percent of the long-termers were committed to achieving explicit funding goals, while 11 percent planned to make the maximum tax-deductible contribution.

Among employers seeking an alternative to their current plan, the commitment to funding the current plan was surprisingly strong. In this segment, 27 percent planned to contribute enough to ensure full funding, and 23 percent would contribute enough to achieve explicit targets, with 9 percent planned to contribute the maximum tax-deductible amount.

Plan Design

The survey also found that employers have made and are planning to make changes in the design of their defined benefit plans. For example, 29 percent reported having completed a substantial revisions in pension plan design, and another 16 percent have made design changes and anticipate further adjustments in the future.

An additional 27 percent reported that plan design modifications are underway and 19 percent said they intend to modify their plan.

Those committed to the long-term viability of their plan made fewer overall changes and expect to make fewer changes than those who are seeking an alternative.

Financial Instruments

The survey asked employers about their use of financial instruments, such as swaps, forwards, futures, options and derivatives. In all these categories, employers who have a long-term commitment to their plans were more likely to use financial instruments.

For example, 44 percent of those with a long-term focus used interest rate swaps, while 27 percent of those seeking an alternative used them.

Employers who used financial instruments found the instruments had a neutral or positive impact on the defined benefit plan during the financial crisis, according to the survey.

For example, 67 percent who used interest rate futures found no effect or a positive effect, while 22 percent reported that the use of these instruments had a negative effect.

Risk Management

The survey found that 75 percent of respondents are more likely to focus on risk management than focus on seeking additional returns.

Surprisingly, however, the use of financial instruments was more often associated with on increasing returns rather than reducing risk in the portfolio.

Among companies focused on increasing returns, for example, 53 percent were likely to use currency forwards to increase returns, while 35 percent say they use this instrument to manage risk.



Copyright © 2009 by Robert Stowe England

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