PLANSPONSOR - November/December 2024 - 22

2024 DEFINED BENEFIT ADMINISTRATION SURVEY
In contrast,
the top risks cited by those not considering
reopening their plans were interest rate volatility (63%), investment
risk (62%), mortality risk (14%) and compliance risk (10%).
In an analysis of all U.S.-listed companies that report data
about a defined benefit pension plan, Hunt identified a group
of firms at which the pension surpluses exceeded $200 million,
the funded ratios were greater than 110%, and the service
cost was less than 2.5% of their current liability, according to
Bloomberg data.
Some exceeded 130% funding, including Bank of America,
Bank of New York Mellon, Campbell Soup Co., Honeywell and
JPMorgan Chase & Co., Hunt says, with the qualification that
these figures represent combined global plans and do not distinguish
between U.S. and non-U.S. assets.
" They have possibly the most to gain by considering
reopening because they've got, effectively, a surplus in their
plan that they're not using, " Hunt says. " It's a strategic asset,
and you could argue that they could redeploy it by using it for
employee benefits. "
" It's a strategic asset,
and you could argue
that they could redeploy
it by using it for
employee benefits. "
Companies' Response
Mike Moran, a New York City-based senior pension strategist at
Goldman Sachs Asset Management, also sees many companies
discussing how to regard these strategic assets. He likens this time
to prior periods when some pensions showed surpluses, such as
in 1999 and 2007. Every year, he analyzes the level of pension
funding among firms in the S&P 500 Index, and, at the end of last
year, he found that 30% of plans had at least 105% funding.
" In some periods of overfunding, some sponsors didn't
take action to protect that overfunding and, consequently, saw
deficits reemerge, " Moran says. " Today, we are seeing sponsors
take action to capitalize on this position of strength, although
the actions are quite varied. "
Those choices include considering redirecting surpluses to
pay for employee health care costs or using them as a strategic
asset in mergers and acquisitions, which can be key when the
prospect is a firm with an underfunded pension plan.
" In this environment, we're seeing a lot of organizations
appropriately evaluate this position of strength, " Moran says.
" They're saying, 'What are my goals and objectives with my plan?' "
Some sponsors who want out of the pension business
are using this period of overfunding to reduce funded status
22 PLANSPONSOR.COM November - December 2024
volatility and, at times, shrink their plan through annuitization,
he says. But others are also reevaluating their goals and
objectives and considering reopening their plan and pursuing
a cash-balance structure.
" When a plan is 80% funded, sponsors can't wait to get
out of the pension business, " Moran says. " Now that many are
overfunded and potentially generating pension income on their
income statements, some are recognizing the value of the plan
and are looking to retain it. "
John Lowell, a partner in October Three Consulting in
Woodstock, Georgia, also expects the analysis to be company
specific. Many companies with a surplus may see a strong argument
for redirecting the surplus to pay Pension Benefit Guaranty
Corporation premiums and other expenses, he says.
Search for Solutions
While many companies are posting pension surpluses, Lowell
also notes an increasing political interest in fostering pensions.
Earlier this year, the Senate Health, Education, Labor and
Pensions Committee held hearings on the topic of what could
be done to expand DB pension plans in the private sector, then
followed up by seeking input on new potential solutions.
Lowell, a member of the National Institute on Retirement
Security, is part of a working group the committee has tasked
with providing options that might prompt companies to return to
these plans. The committee asked his group, " 'What would it take
to give [companies] more intrinsic incentive to be starting defined
benefit plans; what could [the HELP committee] do?' " Lowell says
one of the big pushes is to address the concern companies have
about PBGC premiums.
Both Hunt and Moran also regard the current premiums
and regulatory environment as a possible stumbling block.
" There are a lot of plans looking at it, evaluating it in line
with the other uses of surplus options, but there are a number
of reasons that are probably holding some plans back, and that
has to do with the broader regulatory environment where PBGC
premiums continue to go higher and the regulatory environment
is very complex; you have multiple definitions of the
liability, " says Moran. " I would not be surprised if some other
companies do potentially reopen, but I don't expect it to be a
massive wave because of these other forces. "
Hunt describes the PBGC premiums as a modest friction
point compared with the larger benefit of making use of large
plan surpluses.
" There are well-known costs that are associated with
running a DB plan, such as administration fees, PBGC premia,
actuarial fees, " Hunt observes, adding that companies should,
as always, seek professional guidance about their circumstances.
" But to the extent that a plan sponsor already has a DB
plan, reopening does not materially increase these costs going
forward, and certainly they are small in relation to the potential
financial lift given by making productive use of the surplus in
the plan. " -Elizabeth Harris
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PLANSPONSOR - November/December 2024

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