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Why are pension plans changing?
What are pensions plans changing?
The end of a trend?
The long-term trend has been toward closing pension plans to new participants and then freezing new benefit accruals. But we’ve noticed two developments running counter to that trend:
- According to government filings, the percentage of open and ongoing pension plans has begun to level off at about 50%. This leveling off may indicate that sponsors who maintained open and ongoing pension plans after the global financial crisis, the introduction of more stringent funding and reporting regulations, and the increases in Pension Benefit Guaranty Corporation premiums are “true believers” in defined benefit plans and more likely to maintain them in the future.
- We’ve noticed a large increase in the number of cash-balance pension plans covering a small number of participants. Anecdotal evidence suggests that this type of plan has become popular with partnership firms such as doctors, lawyers, and financial service professionals, allowing them to benefit from more favorable tax treatment and higher allowable contributions than defined contribution plans.
How can an OCIO help with pension plan changes?
Plan sponsors reported that they don’t have sufficient expertise, staff, or time to devote to administering their pension plans. With more than 25 years of experience, Vanguard’s outsourced chief investment officer (OCIO) services for pensions can help plan sponsors navigate the regulatory and fiduciary considerations that come with managing—and changing—a pension plan.
All types of pension plan changes also affect how the plan’s assets should be managed before, during, and after the changes. An OCIO can help analyze, recommend, and implement asset allocation changes that should result from plan changes. As Vanguard Senior Investment Strategist Valerie Dion explains, “An OCIO provider is well positioned to understand and explain how the risks in a plan can be managed or can be challenging to manage depending on the plan design. Before deciding on changes, plan sponsors should get their OCIO provider’s perspective on the possible effects of the change.”
“Vanguard OCIO services can perform an asset liability study based on a pension plan’s pre- and post-change status,” Jim says. “We can recommend a post-change portfolio and help the plan sponsor transition from the current portfolio to the post-change portfolio.”
- All investing is subject to risk, including the possible loss of the money you invest.
- Diversification does not ensure a profit or protect against a loss.
- Advisory services are provided by Vanguard Advisers, Inc. (VAI), a registered investment advisor.