Mitigate Pension Plan Risk Effectively in 2025

As of 2022, approximately 46,500 defined benefit pension plans were active, according to the Employee Benefits Security Administration. While these plans provide essential retirement security for participants, they also carry significant risks for sponsors. Market volatility, economic trends, and fluctuating interest rates all contribute to the challenge of maintaining a well-funded plan.

De-risking strategies, including plan termination and annuity buy-outs, can help sponsors reduce financial exposure while balancing liabilities and assets. With higher interest rates presenting a favorable environment, 2025 could be an opportune time for companies to explore these options.

Interest Rates: A Driving Force Behind De-Risking Decisions

Interest rates significantly impact pension plans by influencing the valuation of both liabilities and assets. Higher interest rates can reduce the present value of future obligations, making it more cost-effective for sponsors to implement de-risking strategies such as plan termination or participant cash-outs. Conversely, lower rates increase liabilities, driving up costs for plan sponsors.

The sustained rise in interest rates over the past year has presented favorable conditions for pension plan de-risking. By discounting future pension payments at higher rates, sponsors can lower lump-sum payouts or annuitization costs. This creates an attractive window for organizations seeking to mitigate pension-related risks.

Key Considerations for Interest Rate Monitoring:

• Assess the impact of fluctuating interest rates on liabilities and costs.
• Determine how changes in discount rates influence lump sum payments and annuity pricing.
• Balance asset valuation adjustments against liability reductions to optimize plan funding.

Is It Time to Terminate Your Pension Plan?

Plan termination is a complex decision requiring careful analysis and long-term planning. The process often spans a year or more and involves navigating regulatory approvals, participant communications, and market conditions.

In recent years, many plan sponsors have embraced strategies like group annuity buy-outs to transfer liabilities to insurers. This approach reduces balance sheet volatility and simplifies the ongoing management of pension plans. In 2023 alone, pension plan transfers to group annuity contracts exceeded $45 billion—a clear signal that sponsors are increasingly viewing plan termination as a viable de-risking strategy.

Steps to Consider When Terminating a Pension Plan:

1. Analyze Plan Metrics: Assess current liabilities, assets, and associated costs.
2. Evaluate Interest Rates: Review plan-specific lump sum rates and potential market shifts.
3. Account for Administrative Costs: Factor in expenses for third-party administrators and legal counsel.
4. Plan for Timing: Anticipate changes in market conditions that could influence termination costs.
5. Amend Plan Documents: Update documentation to reflect de-risking or termination strategies.
6. Seek Regulatory Approvals: Obtain clearance from the Pension Benefit Guaranty Corporation (PBGC) and IRS.
7. Notify Participants: Fulfill legal requirements for participant communication regarding plan changes.
8. Execute the Strategy: Implement the planned reduction or termination in a structured manner.

Proactive planning allows sponsors to adapt to economic triggers, ensuring flexibility in decision-making. Early-stage reversals of termination strategies are often feasible, providing additional safeguards for sponsors.

Is De-Risking Right for Your Pension Plan?

The decision to pursue de-risking strategies depends on a variety of factors, including a plan’s funding status, economic conditions, and the sponsor’s long-term business goals. Higher interest rates and market stability in 2025 may provide a timely opportunity for companies to reassess their pension strategies.

Factors to Evaluate:

• Economic Environment: Consider how prevailing interest rates affect liabilities and costs.
• Upfront Costs: Weigh the immediate expenses associated with plan termination against long-term savings.
• Future Business Plans: Align de-risking strategies with the company’s broader financial goals.
• Regulatory Compliance: Ensure all actions comply with ERISA and PBGC requirements.

Given the complexity of these decisions, engaging with experienced professionals is critical. A strategic partner can provide insights into the financial and regulatory intricacies of de-risking, guiding sponsors toward solutions tailored to their unique circumstances.

How WEI, WEI & CO., LLP Can Help

Navigating complex financial and operational challenges requires a strategic approach and experienced guidance. At WEI, WEI & CO., LLP, we provide tailored advisory services to help organizations streamline processes, mitigate risks, and achieve their goals.

Visit our Management Advisory page to learn how WEI, WEI & CO., LLP can support your organization’s growth and operational efficiency.