Following a flurry of investment de-risking activity after the global financial crisis, plan sponsors have recently turned to pension transactions — such as voluntary lump-sum and bulk annuity buyouts — as cost-effective ways to reduce or eliminate legacy pension obligations. Much of this activity has involved liabilities easily transferred to a receptive and vibrant insurance market.
In our 2017 paper “DB Pensions and the Emergence of the Big Bang Strategy,” we described a confluence of factors that may drive many plan sponsors to accelerate these de-risking changes, with many terminating their plans entirely.
Although we anticipate that a near-term upswing in plan terminations will put pressure on capacity, we also foresee a parallel growth in those fully funding and winding down their plans on balance sheets over time. This challenge of steady-state pension management will drive pension investing to a “hibernation” focus for many, which is the focus of this paper.
Hibernation investing involves putting plans in a steady state while winding them down over time and/or gradually preparing for pension risk transfer over a longer period of time.
For a plan entering a hibernation period, four key priorities come to the fore. Sponsors will want to:
Ultimately, the need for close integration between asset and liability management will be more acute than ever, as DB obligations navigate to their many destinations.