Some are aiming for a fully funded plan runoff over the long-term using a low volatility investment approach. Many, however, are expressing interest in more fundamental strategies to shrink liabilities through a combination of voluntary lump sum payments to plan participants and full or partial termination by purchasing annuities.
The potential flows involved are very large and are receiving a lot of attention from banks, insurers and asset managers as these flows represent both an opportunity and a threat to current business models. We estimate that overall single employer-sponsored corporate DB pension plan liabilities total in the region of $2 TN on a US GAAP basis.
In this executive summary, we aim to provide the reader with a brief understanding of how large corporations can create shareholder value by transferring defined benefit pension risk off of their balance sheets, given the right conditions. Specifically, we:
- Provide an overview of the current US defined benefit pension landscape for large corporations
- Describe a technical framework for determining the economic benefit to shareholders of transferring pension risk off the balance sheet
- Lay out a practical roadmap for derisking pension plans in scenarios where it makes economic sense to do so
