Market Volatility Demonstrates Need for Pension Plan Termination Strategy

June 16, 2022

Your pension plan’s improved funding status is now face-to-face with market volatility, geopolitical uncertainty and hints of a recession. If you’ve been contemplating de-risking your defined benefit pension plan, the time may be right to develop a successful pension risk transfer strategy.

Successful Plan Termination Starts with Structured Approach

As 2021 wrapped up, market performance and interest rates improved the funded status of pension plans to levels not seen since the Great Recession (December 2007 to June 2009).

Just a few months into 2022, however, market volatility and dread of an economic downturn are making headlines and continuing to push a wave of employers forward to de-risk their pension plans. According to recent statistics provided by Legal & General Retirement America (LGRA), the first quarter of 2022 has generated a record-breaking $5.5 billion in pension risk transfers in the United States*. As of late May, the average funded status in the U.S. remains the highest in 13 years providing employers with continues opportunities to de-risk.

With an eye on today’s economic situation, employers who had planned for a plan termination in recent years can take action now to de-risk their plans. Establishing a strategy and structured approach are critical to implementing a successful pension risk transfer – whether the plan termination is 1, 5 or 10 years away.

Plot Your Plan Termination Path with COMPASS

The plan termination process requires numerous steps, but there are also actions employers can take to better prepare for a plan termination. Exploring the plan’s investment strategy, understanding the benefits of de-risking and developing a formal contribution policy are key to determining your pension plan’s financial readiness for termination.

COMPASS, USI Consulting Group’s (USICG) proven pension plan termination solution, helps guide employers through a three-step process:

1. Educate – USICG’s actuaries examine your pension plan’s status and adeptly educate you on the available de-risking options.
2. Navigate – USICG’s pension plan termination team helps employers navigate the glidepath, compliance requirements and administrative complexities needed to terminate your plan. All filings and participant notices are executed by our team.
3. Terminate – USICG’s annuity placement consultants guarantee that the safest insurer with the best value, in accordance with DOL IB-95-1, will be procured to administer the benefits of plan participants who do not elect lump sum distributions. With this final step, organizations can successfully terminate their pension plans.

Case Study: Plan Termination Turns Up Earth-Moving Savings

In a recent case study, USICG was hired by a heavy construction rental company to assist with their pension plan termination. The plan was $6 million underfunded and the client did not believe they were in a position to terminate the plan.

USICG’s team of experts analyzed the situation and educated the client on termination strategies and timelines under several assumptions and contribution amounts. After reviewing the options, the client chose a five-year timetable to terminate their pension plan and also committed to making $1.5 million annual contributions.

Following the Compass approach, the client was able to control and reduce the plan’s underfunding. In addition, during the third year of the five-year plan, a new required mortality table was released by the IRS. USICG’s proactive advice put the client in a more advantageous position. The result was the client was able to accelerate the termination by one year and reduce the total cost by $2 million. In addition, USICG’s annuity placement specialists saved the client $580,000 in the final phase of the termination for a total of $2.6 million in savings.