$20 Billion Club Strategy Series – Benefits Policy

Executive summary:

  • Benefits policy is one of the key levers a plan sponsor can pull to impact a plan’s outlook. This can range from very minor tweaks to the plan’s benefit formula to major adjustments that close the plan to new hires or freeze the plan’s accrual for existing participants
  • Over the past decade or so, there has been a broad trend in the industry toward closing and freezing defined benefit plans.
  • Closing and/or freezing a defined benefit plan will inherently reduce the risk that the plan poses to the plan sponsor, due to the reduction in future uncertainty associated with benefit accruals for active participants.

Today we continue our series on the $20 billion club strategy. For the uninitiated, the $20 billion club is a group of pension plans with more than $20 billion of global pension liability. We have been reporting on this group for the last 13 years, following how and why their funded status has changed over time and reporting on how these sponsors’ strategies for managing risk have evolved over time.

While we encourage you to read the first article to see what these mega-plan sponsors are working through in their investment policies, there are some key points worth reemphasizing. This series of blogs is for addressing the major levers that plan sponsors can pull to impact the trajectory of their large defined benefit (DB) plans. These three broad levers are often closely intertwined and pulling one lever can lead to adjusting another. The three key levers are:

  1. Investment policy - This lays out how those contributions go to work for the sponsor
  2. Benefits policy - This directly impacts plan participants’ benefit accruals
  3. Funding policy - This determines the contributions made by the sponsor to pay for those benefits