SPONSORED SEC TION Pacific Life Insurance Company is not affiliated with PLANSPONSOR.
Preserve Your Funded Status
Once a plan sponsor attains 100% funding of its pension
plan, a buy-in or Insured LDI product, like that offered from
Pacific Life, protects a plan’s 100% funding.
Source: For illustrative purposes only.
the buy-in contract. In fact, the plan can keep the buy-in
contract in place indefinitely or convert to a buy-out, whether
they terminate the plan or not.
PS: So, to summarize, if the economic environment
under the new administration encourages plan sponsors
to fully fund their pension plans, it sounds like Pacific
Life has some valuable tools for pension plan sponsors.
Proctor: The last thing those plan sponsors want is to fully
fund their plan and then learn something’s happened in the
market that has caused them to be underfunded again. Once
they’re fully funded, they need to put a lid on that plan and
secure that funded status. The tools we have available can
help them do that.■
1PBGC website. Premium rates. April 2017
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. Only an advisor who is also a fiduciary is required to
advise if the product purchase and any subsequent action taken with regard
to the product are in their client’s best interest. 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.
the plan and get that liability off your balance sheet. A plan
termination can take six to 18 months or longer. So, that’s
why we’ve built insurance options that offer flexibility for plan
sponsors. There are tools that can help them lock in their
funded status while they proceed with their plan termination.
PS: How would that work? How quickly can a plan
sponsor act to ensure its funded status doesn’t deterio-
rate after it has fully funded the plan?
Proctor: The quickest and probably easiest way to secure
the plan’s funded status would be to use our Insured LDI
[Liability-Driven Investing] solution. Insured LDI is a guaranteed match to the plan’s projected liability based on the
Citi Pension Discount Curve. This provides an ideal asset/
liability match for the plan sponsor. Thus, the funded status
will remain stable as interest rates and equity markets remain
volatile prior to full plan termination. In addition, Insured LDI
is fully liquid, which allows the plan sponsor to withdraw the
money without penalty at plan termination in order to pay
lump sums or purchase annuities.
PS: What other options are available to plan sponsors to
preserve their funded status?
Menin: There's another tool that's actually been a little bit
more prominent in the United Kingdom. A buy-in annuity
contract is an option for locking in costs and preserving
funded status. Like Insured LDI, the buy-in will help stabilize
the plan’s funded status and doesn’t require that the participants be notified of the annuity purchase, so the contract
can be executed fairly quickly. The buy-in goes a step further
than insured LDI by locking in all costs related to the annuity
purchase including mortality, early retirement and other
demographic changes. So, if a plan sponsor had just fully
funded its plan and then wanted to quickly and completely
lock in the annuity costs—say, interest rates had spiked at
the same time—then a buy-in might provide a great solution.
PS: What other advantages does a buy-in provide for a
defined benefit plan sponsor?
Proctor: The buy-in allows the plan sponsor to control when
it completes the liability transfer regardless of what’s going
on in the market at that time. When a plan is terminating,
there is usually a 120-day window for the plan to distribute
assets after receiving IRS approval. If interest rates drop
and the plan is not properly hedged against interest rate
movements, then the plan might have too little money to
purchase the annuities needed. The buy-in contract can be
put in place, and then the plan sponsor can file the termination paperwork, prepare notices to plan participants and
do all of those things it needs to do when terminating the
plan. Once the plan sponsor is ready to fully terminate the
plan, it would simply write us a letter to request that the
buy-in be converted to a buy-out and issue annuity certificates to participants. As far as we know, Pacific Life was
the first insurance company to successfully convert a buy-in
contract to a buy-out contract.
It’s important to mention that the plan sponsor is not required
to terminate the plan or convert to a buy-out after purchasing
Buy-In/ Insured LDI