Achieving Pension Freedom Through Liability-Driven Investing

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”!

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