Dear Corporate Pension Actuary: We’re considering terminating our traditional defined benefit pension plan but understand that it can be a long, expensive process with unintended impacts on participants and company financials. Are there any alternatives we could consider?
- Wondering If We Can Keep Our DB Plan
Dear Wondering:
A defined benefit plan can be a valuable part of a total rewards package, so it’s prudent to consider all options before jumping to terminate it. A plan termination can be expensive, spur big accounting charges, and could impact employee trust and morale, especially for anyone approaching retirement. Here are some common alternatives to consider:- Accelerated funding: Pump in extra contributions now to help the plan get healthier today so future costs and insurance premiums shrink over time.
- De-risking strategies: Match your plan assets more closely to your liabilities—or consider transferring a portion of the liabilities with initiatives like limited lump-sum windows or annuity purchases—to reduce volatility and long-term risk.
- Switch plan type/design: Convert your traditional plan to a cash balance or variable annuity plan. These designs can limit volatility while still offering lifetime income options to participants. They can also be paired with 401(k) plans as part of a comprehensive benefits program.
These alternative approaches can offer more predictable future costs and be more manageable for your finance team.
For employees, these changes usually mean they still have a pension-style benefit, often portable and predictable—and are easy to understand, especially in cash balance plans. All of that helps maintain trust with your workforce.
Bottom line
You really don’t have to close the door completely. These defined benefit pension plan alternatives help you reduce risk, cut down on accounting surprises, and show your people you still care about their long-term security—a win–win for your organization and your employees.
- Your Milliman Actuary
This edition of Dear Actuary was written by Vanessa Vaag FSA, EA, MAAA.