Understanding risks and solutions: A pension de-risking case study

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By Jennifer Wang, Stuart Silverman | 09 October 2014

Corporations with pension plans can be viewed as corporations owning life insurance companies (offering lifetime annuities to plan participants). De-risking these pension plans has become an increasingly important topic for chief financial officers as they try to manage their corporations’ risk.

Annuitization is often touted as one of the primary options to de-risk pension plans, but there are actually many strategies available for consideration. Each has its own strengths and weaknesses, so it is paramount for CFOs to have the appropriate information before making a decision. CFOs must also understand the risks associated with their pension plans, and should be able to define each corporation’s unique risk tolerance.

Longevity risk is often overlooked in the United States because of its long-term nature. However, it is an extremely important risk to consider when de-risking pension plans, due to the tremendous level of mortality improvement experienced in the United States within the last five to 10 years.

In the case where annuitization is determined to be the best solution, the process of obtaining annuity prices introduces a whole new array of considerations for the CFO. Because the annuitization of a pension plan is analogous to selling a life insurance company, we believe obtaining an independent actuarial appraisal can assist the corporation in securing the most cost-efficient annuity.

This article was published in Institutional Investor Journals (subscription required).

To receive a copy of this article, please contact Stuart Silverman at stuart.silverman@milliman.com