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The Disappearance of U.S. Defined Benefit Plans? Not so Fast, say Aon Experts

CHICAGO, Ill., September 28, 2017 – While the decreased prevalence of corporate pension plans has dominated headlines over the past decade, a new report by Aon, a leading global professional services firm providing a broad range of risk, retirement and health solutions, shows that just 6 percent[1] of U.S. corporate pension obligations have actually been settled since 2012.

“While the number of closed and frozen defined benefit plans continues to increase, plan sponsors still have an obligation to fund these plans, which means they are far from being eliminated altogether,” noted Rick Jones, retirement & investment senior partner at Aon. “Pension risk transfer is a trillion dollar market, and much more will be settled in coming years as corporate finance and insurance market environments allow. There is only so much bandwidth in both, but plan sponsor interest and market capacity continue to grow.”

Aon’s report, covering 100 U.S. plan sponsors totaling nearly 4 million participants and $400 billion in assets, found that the majority of plan sponsors are continuing to look at settlement strategies to opportunistically shrink the size of their pension plans:

  • 43 percent have implemented a lump-sum offer to former employees and 39 percent say they are somewhat or very likely to implement this approach in the next 12 to 24 months
  • While just 8 percent have implemented an insured annuity buyout to date, the number of plan sponsors adopting this strategy could at least double within the next 12 to 24 months.  

“PBGC premiums are becoming a material drag on pension asset growth for underfunded plans,” said Ari Jacobs, global retirement solutions leader at Aon. “We’re seeing situations where expected PBGC premiums owed on behalf of some participants are even greater than the value of their expected benefits. Targeted annuity buyouts are capturing the interest of plan sponsors because these solutions can transfer higher-cost obligations to an insurer, where those benefits can be provided much more economically.”

Pension plan contribution strategies

According to Aon research, pension funded status has remained relatively flat over the past five years—around 80 percent—as interest rate declines and mortality improvements have offset strong equity markets.

Despite this, Aon continues to see a surge in corporate pension contributions. In addition to significantly increased usage of corporate debt, contributions are being financed by a number of other sources, with the predominant sources being operating cash flow (75 percent) and cash reserves (39 percent).

“There are many reasons that plan sponsors are looking to increase cash contributions, including increased PBGC premiums, the prospects for tax reform, growing impatience with continued pension deficits and the expiration of legislated funding relief,” added Jones.


About Aon

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[1] Aon analysis of settlement activity from company SEC filings from 2012-2017; including annuity buyouts and lump sum windows


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