Many companies with frozen pension plans are intending to change their investment strategy in the near future, reducing corporate pension expense volatility and placing themselves one step closer to plan termination, according to a new survey by Aon Consulting, a human capital consulting organization.
Aon Consulting surveyed more than 70 U.S. organizations, with a cumulative total of frozen pension plan assets of over $50 billion, and found that 81% are planning to change their investment strategy in the near future, with many looking to hedge significant risks (35%), change investments to reflect the shorter investment horizon to termination (27%), or move to a more liability-driven-investment strategy (19%).
"The majority of plan sponsors want to terminate their frozen plans quickly, but don't have sufficient assets to do so," said Cecil Hemingway, U.S. Retirement Practice Leader with Aon Consulting. "Survey participants told us they made the design changes associated with closing their pension plans (soft freeze) or ending future benefit accruals (hard freeze). However, without addressing the investment paradigm, they are leaving themselves open to significant future risk. Those shifting investment strategies are addressing the risks still inherent in their pension plans, while getting their plans as well funded as quickly as possible."
Beyond modifying the pension plan's investment strategies, 68% of those surveyed have reviewed the expected future cash needs associated with their pension plans and found that additional cuts, outside the pension plan, will likely need to be made. Interestingly, many organizations plan to make cuts in the areas of hiring and training (both new and existing staff) to address these needs.
Conversely, this survey revealed that 19% of organizations currently do not have plans to revise their investment strategies as a precursor to plan termination. Instead, these companies are retaining their current investment structure or moving away from a low-risk, low-volatility structure in an attempt to capture some of the gain they believe will come about in the near future.
"Ultimately, plan sponsors of frozen pension plans have to decide whether they want to terminate their plan, start it up again, eliminate or mitigate accompanying risk, or change the benefits provided under the program. Without a plan, it's highly unlikely that companies will be happy with their pension plans five years from today, and will instead be thinking about what they need to do in order to address the funding shortfalls and economic drain of the plan since it still exists and still has not been addressed."
