The defined benefit pension plan is a popular post-retirement benefit. For the retiree receiving the pension, it’s a valuable perk. If you’re the employer obligated to issue those pension checks, not so much. The nature of a defined benefit pension plan is unpredictable. Unlike most retirement plans that balance risk and return based on market fluctuations, the pension plan balances the risk of your organization’s investments with how similar—or different—they are from the benefits amounts and timing of the pension payments to retirees. Unfortunately, your plan’s investment outcomes may not always offset what your actuary says you owe. So where does that leave your company? Well, with a poorly funded pension plan, your problems can be more significant than just budget unpredictability. A low funding status can also result in:
· Higher contribution requirements
· Higher PBGC (Pension Benefit Guaranty Corporation) premiums
· A weaker balance sheet (Yes, pension underfunding is a form of debt.)
· Lower credit ratings
· Reduced earnings
· Benefit restrictions
Those complications are bound to leave you wishing for a way out. However, companies must essentially overfund their pension liabilities in order to exit the pension world. Is there another way? The good news is “Yes”!
Devising an Exit Strategy with Liability Driven Investing
Rather than remaining in the dark about your organization’s ever-changing pension plan liabilities, you can make sure your investments are always working toward your plan’s funded status—through Liability Driven Investing or LDI. Simply put, LDI is the process of determining which benefits are owed in the future and what’s needed to achieve that through a coordinated investing and funding strategy.
The goal here is to earn your way through your pension liabilities. In order to accomplish that, bridging the gap between actuarial evaluations and your investment strategy is critical. You’ll need the help of pension experts who can develop a custom plan every time your funded status moves, ensuring that your investments are always working toward your pension-funding goals.
What will LDI do for my organization?
A thorough review of your company’s actuarial evaluations will enable a pension expert to understand your unique financial situation and pension liabilities. Your data will be used to build a custom LDI roadmap—a thoughtful investment strategy targeted toward the benefits you are liable for in the future with a plan for increasing your funding status to meet those liabilities. The LDI roadmap is designed to help you:
· Achieve budget and funding status predictability
· Bridge the gap between your actuary and your investment provider
· Fulfill the benefit commitment to your employees
· Restore control over your retiree benefit methodology (whether that means maintaining your defined benefit plan or terminating it)
Want to learn how our in-house pension experts can develop a custom plan that will help you to earn and pay your way through pension liabilities? Complete the form below!