Vanguard survey: Funded status remains pension plan sponsors' top concern

November 1, 2019

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How are corporate defined benefit pension plans responding to the headwinds of low interest rates, rising pension costs, and longer participant life spans? Our 2019 Survey of Pension Plan Sponsors reveals what's on the minds of plan sponsors as they grapple with these and other challenges.

"The top of mind concern for sponsors continues to be plan funded status, followed by plan costs," said Jim Gannon, a Vanguard senior investment actuary. "These results were in line with those of our 2012 and 2015 surveys."

In a reversal from our 2015 survey, costs now rank higher than interest rates among the risks plan sponsors identify as most important. "The increase of costs related to the maintaining a pension plan have pushed many plan sponsors to pursue strategies that transfer risk either as lump sums to participants or as transfers to insurance companies," said Valerie Dion, a Vanguard senior pension investment consultant. "These strategies were rarely used at the time of our first survey in 2010 but have become common topics of conversation with our pension clients."

Other trends identified in the survey—ones Vanguard views as positive—are a continuing interest in liability-driven investing (LDI) and increasing allocations to longer-duration fixed income. "We take a bigger picture view of LDI strategies and advocate their usage for all corporate pension plans. Whether a plan is open, closed, or frozen, they have a liability that needs to be at the center of any investment discussion. It's not just a question of your allocation mix between fixed income and equity," Mr. Gannon said.

Read the full analysis of our 2019 survey of DB plan sponsors.

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Survey highlights

  • Respondents' top concern was funded-status risk, with nearly 50% of sponsors stating they view only a 1%–5% downside variation in funded status as acceptable. However, the average asset allocation has a funded-status risk approaching 15%, demonstrating a potential disconnect between stated and actual loss aversion.
  • The most common planned investment policy change was continuing to decrease the allocation to return seeking assets, such as equity, and the increase of liability-hedging fixed income allocations, common in liability-driven investing strategies.
  • The rate at which plans have either closed or frozen their benefit accruals has slowed in recent years, showing that plans that survived both a) the regulatory changes brought about by the Pension Protection Act and b) the volatility of the global financial crisis are committed to offering defined benefit pension plans to their participants as a main source of retirement income.

Note: All investments are subject to risk, including the possible loss of the money you invest.