Ready 2012 Pension Pulse Survey - Health | Aon · Ready 2012 Pension Pulse Survey Our View • Companies need to make certain that they understand the risks that their retirement

Ready 2012 Pension Pulse Survey

Spring 2009


As a result of increasing press regarding both the number of pension plans that have

eliminated their retirement plan’s benefit accruals to all or a portion of their workers

and the degree to which those companies have put in place policies, programs, or plan

changes to avoid, eliminate, or mitigate risk, Aon Consulting undertook a survey of

companies with frozen defined benefit (DB) pension plans in January of 2009 to address

these questions. Some questions dealt only with plans in which no participants accrued

any benefits (“hard frozen” or simply “frozen” plans) and some dealt with plans closed

to participants that did not meet certain age and service requirements (generally new

entrants), often called “soft frozen” plans. About 70 companies with more than 100 frozen

DB plans responded to the survey, with companies representing all regions of the country,

and with frozen plans (as measured by assets) ranging in size from less than $25 million to

more than $10 billion.

OverviewKey Findings• Companies with multiple plans tend to freeze them all in a similar manner the

majority of the time. When they don’t, the less affected plans tend to be union-negotiated plans.

• Most companies are investing the assets of their frozen plans in the same manner that they did before the plan freeze. Many of the companies noted that they have investigated the level of risk that the pension plan generates, and deemed as “acceptable” the risk the current frozen benefits, cash funding strategy, and investment model generates. The majority also noted that they intend to change at least their investment structure in the future, however.

• Most companies with hard frozen plans would like to terminate them in the near future. Unacceptable financial volatility and contribution requirements were the primary reasons for this. A lack of current assets, and a lack of a plan as to how to achieve the necessary funding with an acceptable level of risk stops the majority of the sponsors from doing so today.

• While a significant minority of plans with soft freezes in effect intend to continue to operate their plans for the foreseeable future, most are considering changes due to the cost and volatility of retaining even their soft frozen plans.

• Most employers (more than 75%) contemplating a plan termination within the next five years intend to use multiple vendors, as they believe the potential cost savings and efficiencies generated by utilizing only one vendor are much less important that the expertise, specialization, and fiduciarily prudent behavior generated by using multiple vendors.

page 1© Copyright 2009 Aon Consulting


Our View• Companies need to make certain that they understand the risks that their retirement plans generate for the corporation and its shareholders, and have the benefit design, contribution policy, and investment policy all reflect that level of risk. For many companies, this will mean a change from the historical investment paradigm, as noted in the result that showed that most frozen plan sponsors intend to change their investment policy in the future. Aon believes that the time to review the investment policy and, if the desire is to terminate the pension plan within the next five years, to develop an investment policy that recognizes this termination strategy, is now.

• Once a plan has been frozen, it loses its HR value – the attraction and retention of the workforce and the ability to effectively manage the workforce. The plan now becomes a debt of the organization that can bring substantial risk (asset as well as compliance risk) to the organization. This risk needs to be understood and addressed. For many organizations, the plan should be de-risked over time and potentially terminated at an appropriate time. Review of the risk will typically generate very different approaches to asset allocation and plan management than had been in use prior to the review.

• Aon believes that plan sponsors should make certain that their goals and desires are understood by their consultants, and that any potential conflicts of interest are addressed before termination strategies are set. A preliminary review of the potential vendors available to assist with a termination and a clear discussion of the goals of the plan sponsor will benefit everyone involved in the process.

• Aon recommends that companies considering the freezing or termination of their DB pension plan consider appropriate communications in order to control the message and reaction of the employees. Additionally, consideration of changes to other plans as a result of a plan freeze or termination (potentially including DC plans, severance plans, and retention plans) may be appropriate as well.

• While it is true that a significant number of companies have frozen their DB plans within the past three years, the majority of plan sponsors retained their plans without a freeze. Aon believes that defined benefit plans still provide real value to many employers and the choice of whether or not to retain or freeze the plan should be based on whether or not the plan meets sponsor and employee needs, and whether or not its risks can be acceptably addressed.



Detailed Survey Results The majority of the companies that responded to our survey had a least one hard frozen

plan (defined as a plan in which benefit accruals are frozen for all participants). Of the 66

companies that responded to our survey that had frozen plans, 48 of them (or 73%) had

at least one hard frozen pension plan. While a number of the companies in the survey

reported having both hard and soft frozen plans (defined as a plan in which eligibility to

participate has been limited, generally not including employees hired after a specific date),

unless the company operated a union-negotiated plan, it tended to freeze all its plans using

a similar methodology.

Not surprisingly, more than one quarter of the plan sponsors of hard frozen plans were

contemplating the termination of their plan, a much larger percentage than was reported

by soft frozen or ongoing plans. When removing union-negotiated plans from the mix, the

percentage grew to more than one-third of the hard frozen plans looking to terminate.

When companies were asked, for non-union plans, why they were looking to terminate

their hard frozen plans, or terminate or hard freeze their soft frozen plans, the reasons

provided in order were that (1) the volatility was unacceptable, (2) the plan’s cost is too

great, (3) administrative time and expenses are too great, and tied for (4th and 5th)

employees don’t appreciated the plan and the firm doesn’t want employees working side

by side with different benefits.

Survey Repospondents' Plan Status

Hard Frozen Plans Only65%Soft Frozen Plans Only

27%

Ongoing, Hard and Frozen Plan Combinations8%

0

2

4

6

8

10

12

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Amongst the union–negotiated plans, employers retained the plan in about equal numbers

because they were happy with the plan, or because they were forced to do so as a result of

their contract.

In response to recent events that have highlighted the risks associated with a defined benefit

pension plan, we asked companies what changes they have made to the plan’s design,

investments, or cash contribution strategy since they froze their plan. Two-thirds reported

that they had determined that no changes were necessary as the risk was acceptable, or

that a number of ideas had been investigated, but no changes had been made. More than a

quarter noted that they had changed their cash funding or investment strategy.

We noted that future cash contributions were increasing for many plans, and asked where

the money for these would come from. For most companies, contributions would be

generated by internal returns or from existing cash. For a minority, contributions would not

be necessary due to the fully funded status of the plan, but for a significant minority, the

company would have to generate funds by cutting from the business or borrowing funds,

or they would be forced to seek a funding waiver. Where the company expected to cut

from the business, the hiring of new employees was the most chosen area of known cuts,

although the majority had not yet determined where the cuts would come from.

Plan Sponsor Actions in Reponse to Risk Since Plan Freeze

No changes to plan design, investments, or funding determined, but investigations continue32%

Cash funding strategy changed due to risk13%

3%Benefits changed due to risk

No changes to plan design,investments, or funding required

as the risk is acceptable36%

Other4%

Investment strategy changed due to risk12%

How Will The Pension Plan Contribution Requirement Be Met?

Cuts from business12%

Well funded, so no contributions14%

Seek a funding waiver5%

Borrow funds9%

Internally generated cash60%



We asked companies about their current investment philosophy, and about their

potential future changes to those policies. The overwhelming majority are still invested

in a traditional investment mix (60/30/10), while the combination of hedging interest

rates, using swaps, or investing more than 40% in bonds are strategies utilized by less

than one third of the companies that participated in the study. This paradigm changed

dramatically when we looked at expected future investment strategies. Less than 5%

of sponsors thought they would continue to employ the 60/30/10 standard investment

strategy. Instead, most sponsors are looking to use swaps and other options, increase their

fixed income weightings to partially immunize, or to change to an investment strategy

that reflects the shorter investment horizon associated with their upcoming termination.

Another change to the future probable investment strategy was to increase the equity mix,

in an effort to “earn the way back to an acceptable funded status.”

Pension Plan Contributions Funded by the Following Cuts

Unknown45%

R&D5%

Future Hiring30%

Marketing12%

Training8%

Expected Future Investment Strategy Basis & Components

Use of Swaps and Derivatives35%

LDI approach

5%

Higher than 30% bonds to partially immunize

14%

Use of higher than 60% equity allocation

14%

Reflection of short term horizon to termination27%

Standard (60/30/10)

5%

Current Investment Strategy Basis & Components

Stantard (60/30/10)66%

Use of higher than 60% equity allocation1%

Reflection of short term horizon to termination1%

Higher than 30%bonds to partially immunize

21%

LDI approach7%

Use of Swaps and Derivatives4%



While swaps and derivatives were chosen by a number of plan sponsors as a likely future

investment vehicle to address investment needs, the use of swaps, derivatives, and option

collars were specifically not allowed in a significant minority of the plans that we surveyed,

for both current and future usage. On the other hand, the use of dynamic investment

strategies, such as increasing the percentage of the assets invested in bonds as the funding

status grows, when bond yields are high, or over time, was under study by more than half

the companies that were investigating potential investment changes.

We surveyed companies regarding their future plans. More than half admitted that

they expected no change in the plan’s status in the near future (whether soft or hard

frozen), but would like to terminate the plan in the future. The majority of these sponsors

admitted that they either had no strategy likely to get them fully funded on a termination

basis in the near term, and/or that they didn’t have the necessary assets to accomplish this

in that timeframe.

If and when the plan is terminated, most expected to use multiple vendors to

accomplish this.

Employers understand that a plan termination involves a series of complex steps, and that

there are advantages and disadvantages to using one vendor, or a number of different

vendors. For those plan sponsors that intended to use only one vendor, cost savings and

efficiency were the two primary reasons provided to use a single vendor for actuarial,

annuity selection, investment, and the other needs associated with plan termination. By

comparison, most sponsors choosing to use multiple vendors named fiduciary concerns as

the primary rationale for using multiple vendors, with knowledge/experience secondary,

and price tertiary.

Use a single vendor

21%

Use multiple vendors

79%

Termination Vendor Choices


ABOUT AONAon Corporation (www.aon.com) is the world’s #1 choice

for risk advice, insurance brokerage and human capital

management, delivering long-term value to clients through

inspired, independent thinking and inventive, personalized

business solutions that have tangible impact on the bottom

line. The Aon team of 36,000 colleagues in more than

500 offices and 120 countries goes to work every day

with a singular purpose of helping clients or helping their

colleagues help clients.

Aon Consulting is shaping the workplace of the future through

benefits, talent management and rewards strategies and

solutions. Aon Consulting was named the best employee

benefit consulting firm by the readers of Business Insurance

magazine in 2006, 2007 and 2008.

Copyright Aon 2009

Published by Global Corporate Marketing

and Communications

#2354 - 04/2009

For More Information:

Defined Contribution

Matt Smith, Senior Vice President,

Aon Consulting

[email protected] 206.467.4608

Defined Benefits

Brad Klinck, Senior Vice President,

Aon Consulting

[email protected] 732.302.2167

Documents

Ready 2012 Pension Pulse Survey - Health | Aon · Ready 2012 Pension Pulse Survey Our View • Companies need to make certain that they understand the risks that their retirement