PA: If a plan sponsor funds its plans to 100%, how can
it make sure the plan does not end up at 80% again, like
what happened in 2008?
Russ: It can take six to 18 months to completely terminate
a plan and transfer that liability off the company’s balance
sheet. So, it’s important for the company to remove as much
risk from the plan as it can during that process so that funded
status can be maintained.
Plans can consider an Insured LDI solution to guarantee
the assets move with the liability and protect the funded
They can also consider purchasing a Buy-in annuity solution. That really locks in all the costs of those future annuities
and transfers the risk to the insurance company without triggering settlement accounting.
Finally, they can purchase a Buy-out annuity for a subset
of the participants, usually those with the smallest benefits. That will remove that liability, shrink the size of the plan,
and eliminate all future administrative costs related to those
PA: For advisers without DB plan specialization, is there
enough information and support for them to help their
clients with DB plans?
Russ: Absolutely. Even though an adviser may not be a DB
expert, think of the DB plan as an individual saving for retirement: “I need to help them solve their retirement funding
shortfall.” Advisers can reach out to other pension consultants, insurance companies, and the plan’s actuary to gather
the necessary information to identify the funding shortfall
and develop a plan to meet the company’s funding goal.
Marty: Be the adviser who says, “We are going to develop a
plan to get you to 100% funded, and we’re going to protect
that funded status along the way.” If you can solve these
problems for your clients, you can become their trusted
adviser. This could easily lead to a growth in other business
opportunities—including additional defined contribution,
nonqualified plan, or even personal wealth clients.
Pacific Life refers to Pacific Life Insurance Company. Insurance products
are issued by Pacific Life in all states except in New York. Guarantees
are backed by the financial strength and claims-paying ability of the
issuing insurance company. Pacific Life is a product provider. It is not a
fiduciary and therefore does not give advice or make recommendations
regarding insurance or investment products. Pacific Life, its affiliates, its
distributors, and respective representatives do not provide any employer-sponsored qualified plan administrative services or impartial advice
about investments and do not act in a fiduciary capacity for any plan.
to move in the direction of the liability when interest rates
change but not close the funding shortfall.
Russ: Speaking of interest rates, even though the 10-year
Treasury is a common interest-rate benchmark, the pension
liabilities for GAAP accounting are based on corporate bond
rates (e.g., Citigroup Pension Discount Curve). These bond
rates have decreased about 2% from 5.87% at 12/31/08 to
3.77% at 5/31/17. This 2% reduction in the liability discount
rate would result in an increase in pension liability of 20%
to 30%. The fixed income or LDI assets should increase
as interest rates decrease to offset this increase in liability.
However, a best-efforts LDI strategy cannot guarantee
that assets will increase the same as the liability when the
discount rate changes.
Finally, the increasing ongoing administrative expense of
maintaining the DB plan is eating away at the funded status.
PA: What are the risks for sponsors and advisers as they
continue to try to earn their way out of an underfunding
Russ: If what they have done for the last eight years isn’t
working, following the same strategy and hoping that some-
thing different will happen is sure to be a problem. They
should be asking these questions:
• Do they expect the next eight years to provide the same
or better equity returns of almost 13% per year? A market
correction could have a huge negative impact on funded
• Will interest rates finally increase enough to lower the plans’
liabilities? Many have been predicting an increase in rates
for the last eight years, but we are still at a 10-year Treasury
• Is it time to implement a strategy to get the plan fully funded
in a timeframe that fits the organization they’re working with
to move the liability off the balance sheet?
PA: What are other ways advisers can help plan spon-
sors decide when or whether or not to fully fund their
Marty: In 2019, PBGC variable premium levels are going to
be about 4.4% of the unfunded liability. This is a cost that
can be completely avoided simply by fully funding the plan.
Even if the company needed to borrow the money to fund
the plan, they may find the interest cost will be less than the
PBGC variable premiums.
Another incentive to fund now is the potential reduction in
corporate tax rates. Many plans are looking at accelerating
contributions to take advantage of the tax deduction while
the corporate tax rate is higher, versus what might be a 15%
or 20% tax rate in the future.
1Milliman 100 Pension Funding Index, December 2008.
2Milliman 100 Pension Funding Index, May 2017.