Large company pension plans have dramatically improved their financial position in 2021, setting the new year for more pension risk transfers and large companies abandoning defined benefit pension plans altogether.

According to a Willis Towers Watson SA To analyse. Funding status jumped eight percentage points from 2020 and crossed the 90% threshold for the first time since 2007, before the Great Recession.

Traditional pension plans – which workers often prefer over 401 (k) because they guarantee a steady source of income later in life – have withered over the past two decades under strict funding standards and volatile markets. The number of defined benefit plans in the United States has declined 73% since 1986, according to the United States Department of Labor.

Faced with this precedent, many employers will likely use the 2021 funding respite as an opportunity to shed the responsibility of making payments or buying back workers.

“The improved funding position associated with the changes in funding rules provides plan sponsors with the opportunity to advance their retirement strategy in 2022,” said Jennifer Lewis, senior director of retirement at Willis Towers Watson. “Depending on the sponsor’s goals, this strategy may include executing more retirement risk transfers, positioning the plan for the long term, or a combination of both.

Risk reduction and liability

Pension funding improved in 2021 because corporate interest rates rose and markets weathered the uncertainties of the pandemic, said Joseph Gamzon, general manager of retirement at Willis Towers Watson. Overall investment returns have averaged nearly 9% in 2021, he said. Combined with the changes to the funding rules, plan sponsors now have a good excuse to make permanent changes that will mitigate their exposure to future risks.

Many companies “mitigate the risk” of their pension plans by using retirement risk transfers, which buy out workers still enrolled in the plan or transfer the responsibility to an insurance company that will try to balance the annuity payments with the pension. existing assets to make a profit.

But there is a catch: the cost of the buyout or the insurance contract must take into account the unfunded liabilities of the plan.

Average aggregate pension funding levels for Fortunate 1000 companies since 2008 have hovered just below 82%. With an average funding of 96% at the end of last year, the cost of exiting a plan in 2022 has become much cheaper.

“Businesses may decide it’s a much happier time,” Gamzon said. “This year is going to be strong for retirement risk transfers, there is no doubt about it.”

Unknown consequence

In many ways, the trend has already started. According to the Secure Retirement Institute, third-quarter repo buyback sales in 2021 have tripled from 2020 totals. Asset management firm Mercer, a Marsh & McLennan Companies Inc. brand, estimates that the majority of its $ 3.4 trillion in private sector pension assets will be at risk over the next decade.

However, the effect of risk transfers on participants is largely unknown.

State insurance laws impose strict funding obligations on federally enhanced businesses, so insurers typically have to make their payments, but retirees or workers are less certain of being notified of the change.

Lawmakers raised the topic at a hearing in October to consider the president Joe bidenis DOL’s candidate to oversee the DOL Employee Benefits Security Administration. Lisa Gomez, a New Jersey-based employee benefits lawyer, has spent most of her career advising major pension plans and participating employers.

“These entities seek to take advantage of the gap between the returns on the investments and the benefits that are paid, and they often end up shifting assets from traditional, secure investments to much riskier investments,” said Sen. Chris Murphy (D -Conn.). “Some of the companies that are doing it were among the ones we had to bail out in 2008 and 2009.”

Gomez said she would commit to looking into the matter to ensure risk-free assets are in the best interests of workers and their families.