Frozen plans are still different
I have just finished (with Jim Gannon and Justin Owens) an update of the frozen plan handbook that we first created in October 2013. It has (by the standards of publications aimed at institutional investors) been flying off the shelves; this is a popular topic. It’s also a rapidly-advancing topic, which is why we did the update.
The core message of the handbook remains the same:
that frozen plans are different and need to be managed differently
But even in the space of not much more than a year since the handbook was first published, there have been three developments worth noting. These are related to hibernation, the annuity buyout market, and PBGC premiums.
- Hibernation: the emergence of a distinct strategy
The idea of “hibernation” is now called out as a distinct strategy in frozen plan management. It refers to a conscious decision on the part of the plan sponsor to continue running the plan, beyond the point at which it first becomes feasible to terminate. The key lies in the timing: once a plan has been frozen to new entrants, it is on the path to eventual termination. But the balance of cost and risk associated with the plan changes over time. Hibernation preserves optionality.
- Continued growth of the annuity market
The bulk annuity market received a huge boost in 2012 as blockbuster deals by GM and Verizon proved that annuitization was viable for even the largest plans. According to the industry group LIMRA, total activity in 2013 was around $3.8bn despite the absence of any headline deals, and in 2014 that rose to $8.5bn, led by Motorola Solutions and Bristol-Myers Squibb. Within the past two weeks, Kimberly-Clark announced a $2.5bn deal.
- PBGC premiums become a material consideration in funding decisions
In addition to a headcount-based premium, plan sponsors must pay PBGC premiums based on the size of the plan shortfall. In 2013, the variable-rate premium was $9 for every $1,000 of shortfall. In 2014 it was $14. In 2015 it is $24. In 2016 it will be at least $29 (indexed in line with national average wages). So, in effect, pension deficits are about to be taxed at 3% a year. That’s a big enough penalty that we expect CFOs to start paying attention. For many, it could tip the scale in favor of making discretionary contributions above the minimum required.
“Hold on… isn’t that what we said?”
Finally, to the delight of Justin, Jim and myself, the hypothetical “Three Peaks Equipment Pension Plan” case study that we built into the handbook is proving very lifelike. So much so that, more than once, we’ve grabbed our copies so that we can compare a real-life CFO’s quote with the words we put into the mouths of Holly, Charlene and Daniel, the Three Peaks finance team. Sometimes it’s been uncanny.
Anyway, to request a copy of the updated handbook, just click here.