Corporate Pension Sponsor Survey

Seeing an Oasis of Opportunity How COVID-19, Inflation, and ESG Can Deliver Value to Defined Benefit Plans

The defined benefit (DB) landscape is changing, driven largely by three notable factors: COVID-19, inflation, and ESG. While the future of DB will not look like its past, change is not always a bad thing. In fact, if thoughtfully navigated, market and regulatory advances can alter the route of today’s corporate DB plans and tomorrow’s retirement landscape for good.


Setting the Stage


State Street Global Advisors sponsored a survey of 100 US corporate DB plan sponsors in order to understand their current attitudes and future outlooks, with a focus on the exit. Our survey was fielded in July 2021 by Longitude of the Financial Times Group.

When looking ahead, respondents divided themselves into three categories: those seeking an exit, those looking to achieve self-sufficiency,1 and those intending to keep their plan open indefinitely. However, it appears that these paths are not as discrete as survey respondents report.

Figure 1: Reported Long-Term Pension Strategies

Source: State Street Global Advisors. Defined Benefit Outlook Survey of 100 US corporate plan sponsors in July 2021.

For example, those seeking an exit, primarily because the pension is viewed as a legacy asset that adds little value (63% of the 62 exit-oriented respondents), are also likely to pursue partial buyout risk transfers (45%) along the way and explore some form of delegation to an asset manager (27%). In addition, those 33 sponsors seeking self-sufficiency are also hedging their bets, with 52% saying they somewhat to strongly agree that while they work toward a long-term runoff, there is still a possibility they may change course and opt for an exit — though the costs are too high to make this a viable option today. Interestingly, the same percentage of self-sufficiency seekers somewhat to strongly agreed that their pension is a differentiating corporate asset, suggesting that the pension itself is not obsolete yet.

Not surprisingly, corporate plan funding status and plan size have an anecdotal impact on sponsors’ anticipated paths.

Those respondents seeking to keep their pensions open, though in the minority, shared the characteristics of being both well-funded, defined here as 80% to over 100% funded, and having the largest asset pools, most likely because size and funding strength afford these sponsors more options.

However, looking beyond the traditional vectors that segment the DB marketplace and their exit strategies, we explore the disruptions that began in the first quarter of 2020 and have drastically altered the marketplace: the COVID-19 crisis, inflation, and an unexpected ESG appetite. All sponsors are having to pivot, but the ones who will do so most gracefully are the ones who can see beyond the challenges to embrace the opportunities presented by these new elements.


COVID-19


Delaying Exit Strategies in Favor of Corporate Finance Pivots

When asked if the turbulence caused by the COVID-19 crisis impacted respondents’ time frame for achieving long-term pension plan goals, 44% said that their timeline had been delayed. Here, we posit that market upheaval was a significant factor, but an incomplete answer. Higher-priority organizational demands and redeployment of capital expenditure are likely additional drivers of DB delays.

“We lost a meaningful portion of our workforce last year between the early retirement and severance programs that we ran. Capacity dropped by 80%. But it’s given us a chance to take a new look at our route network, simplify our fleet, kick-start fuel efficiency initiatives, and refresh some of our gates. Here, pension management becomes part of our corporate strategy. There was an opportunity to issue debt and make some big portfolio trades that brought our pension up to 91% funded, which allowed us to take risk out of the plan.”

— Jonathan Glidden, Managing Director, Pensions at Delta Air Lines


Inflation


Managing Inflation to Align with Short- and Long-Term Goals 

When it comes to inflation risk management, 56% of well-funded plans (representing 84% of the total sample) say that dimension of plan oversight is aligned with long-term goals. However, plans less than 80% funded (representing 16% of the total sample) have a different view. Here, only 31% are in agreement, likely because of these sponsors’ reliance on growth assets, which makes their plans most susceptible to loss in inflationary environments. Figure 3 represents survey responses in aggregate, without the funded status filter. 

Figure 3: Assessment of Current Practices’ Alignment With Long-Term Goals


ESG


Tackling New Territory with OCIO

While our survey focused on DB plans, 62% of respondents also have defined contribution (DC) oversight. Therefore, we explored investment outsourcing (referred to here as OCIO2) drivers for both DB and DC plans, identifying areas of consistency and disparity.

Figure 4: A DB vs. DC Comparison of Delegation Likelihood and Levers 


A New DB Era


Ushering in a New Decade of Change

By 2030, all baby boomers will be at least 65 years old and most will have retired. This is the same year the greatest concentration of survey respondents, over a third, plan to have exited or wound down their DB plans. 

Figure 5: Time Frame Expectations for Achieving Long-Term Goal 

The year and decade of 2030 will see a change not only to the generational makeup of the workforce, but also to retirement plan structures and internal investment teams. We offer three predictions for the retirement plan landscape in 2030:


About the Survey and Sample


State Street Global Advisors conducted a survey of 100 US corporate defined benefit plan sponsors in July 2021. Decision-makers spanned 15 industries, the top four representing 45% of the sample (16% financial services, 13% health care, 9% retail, and 7% oil and gas). The top three job titles made up 74% of the represented roles (43% VP of finance, 19% VP of HR, and 12% CFO). The objectives of the survey were to understand DB sponsors’ current attitudes and future outlooks surrounding the plan and to identify potential trends — per plan characteristics and objectives — that could make a DB plan more or less receptive to delegation.