Corporate defined benefit pension plans worth reviewing, according to JPMorgan analysis


Since the 2021 “great retirement,” when employees across industries left their jobs en masse, private sector employers have begun rethinking benefits to match current employee preferences. As quoted in a recent JP Morgan Asset Management report, “Pension Thawing: Is It Time to Reopen DB Pension Plans, or at the Least Stop Closing and Freezing?” Forty percent of private sector employees who left their employer cited inadequate benefit packages as a motivating factor in their decision. Additionally, 85% of young workers say that receiving a fixed monthly benefit for life upon retirement is a priority.

Corporate retirement plan sponsors who are reassessing their benefit packages have access to a variety of retirement products, including defined benefit pension plans. In fact, some companies may already have existing “frozen” or closed pension schemes on their balance sheets.

As a matter of background, pensions are a longstanding workforce management tool first introduced to the private sector by American Express in 1875. Pensions were widely adopted in the private sector after the war, reaching peak usage in the 1980s and 1990s. Then 401(k) defined contribution accounts disrupted the retirement industry and grabbed a wider share of the market. Pensions are still common in certain industries, but by 2013 corporate pension plans were considered rare, and the Bureau of Labor Statistics said he had only 19% of employees enrolled in pension plans alone. reporting. This statistic comes as fewer employers offer pensions and access to the scheme has become more difficult.

Today, plan sponsors have more tools than simply choosing between a defined benefit pension plan or a defined contribution account. Modern retirement products offer flexibility in new plan designs, and defined benefit plans are evolving in ways that can reduce employer risk.

According to JP Morgan Asset Management analysisrecent legislation and economic conditions have created a more favorable environment for corporate pension schemes. America’s Rescue Programs Act of 2021 adjusted the required minimum contribution levels and provided financial assistance for existing programs. Plan sponsors have the option to set credit balances and level interest rates to offset future contribution requirements, providing flexibility in cost timing. The Infrastructure Investment and Jobs Act of 2021 extended these reliefs. These tools will remain funded through 2035 and will continue to support plans that may achieve surplus positions.

In addition, rising interest rates in the United States have benefited the funding levels of the schemes by reducing the value of existing debt. In fact, according to Milliman’s recent article, as interest rates rose by 150 basis points in his first five months of 2022, pension plan liabilities fell by 17%. Over time, the plan could have multiple benefits in this area.

A small but growing number of employers are looking to differentiate themselves in a highly competitive labor market, using defined benefit schemes as a means of doing so. Job seekers value retirement benefits when evaluating potential employers, according to John Lowell’s column for October Three. In addition, benefits are consistent with workers’ expressed interest in guaranteed lifetime income and can contribute to attracting and retaining a motivated workforce. Of course, to benefit from the improved service, plan sponsors must clearly communicate the value of pension plans to employees.

A well-funded and well-managed defined benefit pension plan is financially efficient for the plan sponsor. Defined benefit pensions are cost effective and can add value to your balance sheet. Surplus funds are preserved and can support future benefit costs. Defined benefit pensions and defined contribution accounts increasingly occupy a unique niche with a focus on lifetime income, but the efficiency of pension schemes is an advantage.

Additionally, pensions help create an orderly retirement trend that helps manage the workforce. For example, during good economic times (when markets are rising), workers may retire in droves because they are confident they will reach retirement age. But in a sluggish market, where companies often try to cut costs, older workers may tend to stick to their jobs for fear of leaving in the wake of market losses.

Companies with existing closed or frozen pension schemes may indeed be skeptical about taking steps to reopen their pension schemes. But good decisions are based on solid metrics, not outdated common sense. As companies take a new look at pensions and take into account today’s economic and workforce conditions, they will rediscover pensions as a tool that meets employee needs, attracts and retains top talent, and increases corporate revenue. could be improved.

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