Equity markets have rallied in early 2019 and the losses from December 2018 have all but been erased. Interest rates haven’t recovered to the November, 2018 high, but the funded status for most pension plans has rebounded. Findley’s April 2019 Pension Indicator shows how the funded status of pension plans has improved since year-end 2018.
With all of this volatility, plan sponsors that started planning for a plan termination in early 2018, and monitored the improving funded status of the plan, may have taken some steps to help mitigate the impact of a market downturn. In this case, a plan sponsor which hedged the assets to better match the liabilities prior to December experienced only about a 2% reduction in the plan’s funded status during December. In addition, even though a hedged plan following an LDI investment approach hasn’t seen a great improvement in funded status from the market rebound, it still has a better funded percentage than plans with other investment strategies.
The lesson is most plan sponsors probably don’t really know how close (or far) the plan is or was to being financially ready for a plan termination. And, as the adage goes, “failure to plan is a plan to fail.”
Planning is Fundamental to Success
To help plan sponsors understand this volatility and how to manage it, Findley has developed a process to help plan sponsors prepare for a plan termination. (See Findley’s article “Mapping Your Route to Pension Plan Termination Readiness”). The plan termination process itself requires many steps, but there are also steps that a plan sponsor can take prior to beginning a plan termination to be better prepared. Whether plan termination is 1, 5, or 10 years away, planning is critical.
Taking a closer look at plan’s financial readiness, there are a few topics plan sponsors should explore:
- the plan’s investment strategy,
- the benefits of de-risking strategies, and
- a formalized contribution policy.
Reviewing these financial topics early and monitoring them periodically can help plan sponsors achieve plan termination financial goals in a more orderly and predictable way.
Knowing the time horizon, identifying data issues, and reviewing the plan document are other areas to include in your readiness planning. Findley’s Rapid MapTM process helps plan sponsors take a project management approach to all of these aspects of getting ready for a plan termination.
If you are contemplating plan termination, consider taking advantage of this early 2019 rebound. Planning early for a plan termination can have a positive long-term effect on the point in time when your plan is ultimately ready to terminate. Take steps now to put a process in place to regularly monitor your plan’s funded status. Spending time now can reap rewards and potentially mitigate the negative outcomes from future market downturns.
Questions? Contact the Findley consultant you normally work with, or Larry Scherer at Larry.Scherer@findley.com, or 216.875.1920.
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