Edition

Evolution of the Effects of Pension Plans from a Corporate Financial Perspective

Background and Purpose

From a corporate financial perspective, defined benefit (DB) pension plans have an impact on their sponsors. For example, sponsorship of a pension plan can affect the company’s credit ratings, the ability of the company to borrow at affordable interest rates, and the overall enterprise valuation of the entity.

Over the past decade, there have been a number of developments in the U.S. and Canada that could have implications for how rating agencies, lenders, and other stakeholders may factor in the financial effects of DB pension plans on their sponsors. These developments include, but are not limited to:

  1. Many DB pension plans in the private sector are closed to new entrants, and in many cases future service accruals are frozen. Such pension plans are maturing, with the obligations for pensioners becoming increasingly large relative to the obligations for active employees.

  2. Due to significant increases in long-term bond yields during 2022, many pension plans are in the best funded position they have been in decades, including many of them that are in a surplus position for the first time in decades.

  3. Many private sector sponsors are reducing risk in their pension plans by transferring risk to insurance companies via buy-out and buy-in annuity purchase transactions. Likewise, some sponsors are also fully terminating their DB pension plans.

  4. There have been changes to pension accounting rules. For example, U.S. GAAP rules were revised to require that the service cost component of net periodic pension cost be disclosed in income from operations as other compensation. The remaining components of net periodic pension cost are to be reported separately outside of operating income, if a subtotal is presented for income from operations.

  5. In the U.S., the methodology used to determine discount rates used for pension funding has changed several times in the past few years following legislative actions (MAP-21 in 2012, HATFA in 2014, BBA in 2015, ARPA in 2021, IIJA in 2021).

  6. Canadian funding rules for pension plans have also evolved. For example, a number of jurisdictions have moved from funding regimes which were dominated by the requirement to fund to a plan’s solvency liabilities to regimes that are driven by the plan’s going concern liabilities (plus a margin for conservatism).

  7. In 2023, the Pension Protection Act (Bill C-228) was passed by the Canadian Parliament and received royal assent. The bill will give “super-priority” status to pension deficits in the case of company insolvency or bankruptcy.

The above examples all point to how different environmental and legislative developments can have varied impacts on pension plans and in turn, affect their sponsors. In the course of such developments, they can cause the applicable plans to evolve in new ways. Likewise, as a consequence of these developments, the effects of pension plans on their sponsors from a corporate financial perspective can evolve in new ways. With this in mind, the Retirement Section Research Committee (RSR) of the Society of Actuaries Research Institute is interested in an exploration of the evolution of the effects of pension plans on their sponsors from a corporate financial perspective and the implications for plan sponsors, actuaries working on these plans and other impacted stakeholders. The end result is intended to be a useful resource for Retirement Section members who deal with these issues and others who want to gain a solid background on them.

The Institute is simultaneously issuing both a call for essays and request for research proposals. The dual objectives of this effort are to:

  1. Publish a collection of essays that represent a broad range of perspectives on these issues.
  2. Sponsor a research project that provides an in-depth and expanded view on a topic related to these issues.

The next section of this document describes sample topics of interest for both the request for proposals and call for essays.

Submission requirements for proposals and essays are described in the subsequent sections.

Research Objective

The Society of Actuaries (SOA) Research Institute’s Retirement Section Research Committee (RSR) is seeking researchers to explore the evolution of the effects of DB pension plans from a corporate financial perspective in the U.S. and Canada. For background, proposers may wish to review the following papers:

The ultimate deliverable is desired to represent, to a certain degree, an extension of the first paper with applicable concepts from other papers such as above.

The following are suggested areas that the research may cover. Proposers are free to choose which areas they would like to address and there is no requirement to cover all or most of these. These are intended merely as suggestions and other related areas will also be considered in the review of proposals.

  • A summary of the effects of pension plans on their sponsors from a corporate financial perspective, including the effects a DB plan may have on a company’s stock valuation and bond ratings and yields. The summary could also address the extent to which rating agencies and securities analysts pay attention to the details of pension plans, such as priorities in bankruptcy, the plans’ investment strategy, and risky benefit provisions such as providing inflation protection to retirees.

  • A review of the developments and trends over the past decade or so that have impacted the effects that pension plans have from a corporate financial perspective, and what these impacts have been. For example, the researcher could investigate how rating agencies, securities analysts and other market players view significant pension transactions, such as the purchase of buy-out or buy-in annuities, both at the time of and after the transactions.

  • Discuss any actions that plan sponsors can take to mitigate any negative effects that their pension plans are having from a corporate financial perspective.

  • Based on current trends, discuss how the effects that pension plans have from a corporate financial perspective may evolve in the future.

  • Interviews with representatives of different stakeholders, such as CFOs of companies that sponsor DB pension plans, institutional investors, and representatives of rating agencies may be a part of the research approach.

Proposals are preferred which share, as part of their scope, a workable model (e.g., in Excel or a suitable programming language) to demonstrate the concepts outlined in the paper. The model is not expected to be commercial grade. Primarily, the intent of the model is to allow practitioners to gain a further understanding of the key principles discussed in the research for educational purposes. Other projects which have included similar models can be found on the SOA website, including for example, Primer on Retirement Income Strategy Design and Evaluation.

As a modeling example for this effort, a stock valuation model could be built to demonstrate the valuation of a company a) without a defined benefit plan, b) with a defined benefit plan in its current state, c) with a defined benefit plan taking an action; for example, buying an annuity for a cohort of retirees, and/or making a large pension contribution, and/or changing their asset allocation.

Note again that the list above is not meant to be exhaustive but merely examples of proposed topics that may be researched.

Rules for Submission of Research Proposals

Proposal Requirements

To facilitate the evaluation of proposals, the following information should be submitted:

  1. Resumes of the researcher(s), including any graduate student(s) expected to participate, indicating how their background, education and experience bear on their qualifications to undertake the research. If more than one researcher is involved, a single individual should be designated as the lead researcher and primary contact. The person submitting the proposal must be authorized to speak on behalf of all the researchers as well as for the firm or institution on whose behalf the proposal is submitted.

  2. An outline of the approach to be used (e.g. literature search, model, etc.), emphasizing issues that require special consideration. Details should be given regarding the techniques to be used, collateral material to be consulted, and possible limitations of the analysis.

  3. A description of the expected deliverables and any supporting data, tools or other resources.

  4. Cost estimates for the research, including computer time, salaries, report preparation, material costs, etc. Such estimates can be in the form of hourly rates, but in such cases, time estimates should also be included. Any guarantees as to total cost should be given and will be considered in the evaluation of the proposal. While cost will be a factor in the evaluation of the proposal, it will not necessarily be the decisive factor.

    As a guide for developing the project budget, please review the Historical Project Cost Guide (see Appendix)

  5. A schedule for completion of the research, identifying key dates or time frames for research completion and report submissions. The RSR is interested in completing this project in a timely manner. Suggestions in the proposal for ensuring timely delivery, such as fee adjustments, are encouraged.

  6. Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.

Selection Process

The RSR will appoint a Project Oversight Group (POG) to oversee the project. The RSR is responsible for recommending the proposal to be funded. Input from other knowledgeable individuals also may be sought, but the RSR will make the final recommendation, subject to Society of Actuaries Research Institute (SOA) leadership approval. An SOA staff research actuary will provide staff actuarial support.

Questions

Any questions regarding this RFP should be directed to Research-AR@soa.org.

Notification of Intent to Submit Proposal

If you intend to submit a proposal, please email written notification by October 15, 2023 to Research-AR@soa.org.

Submission of Proposal

Please email your proposal to Research-AR@soa.org; proposals must be received no later than November 1, 2023. It is anticipated that all proposers will be informed of the status of their proposal by December 15, 2023.

Conditions

The selection of a proposal is conditioned upon and not considered final until a Letter of Agreement is executed by both the Society of Actuaries Research Institute and the researcher.

The RSR reserves the right to not award a contract for this research. Reasons for not awarding a contract could include, but are not limited to, a lack of acceptable proposals or a finding that insufficient funds are available. The RSR also reserves the right to redirect the project as is deemed advisable.

The Society of Actuaries Research Institute plans to hold the copyright to the research and to publish the results with appropriate credit given to the researcher(s).

The Society of Actuaries Research Institute may choose to seek public exposure or media attention for the research. By submitting a proposal, you agree to cooperate with the [Society of Actuaries/sponsoring entity] in publicizing or promoting the research and responding to media requests.

The Society of Actuaries Research Institute may also choose to market and promote the research to members, candidates and other interested parties. You agree to perform promotional communication requested by the Society of Actuaries Research Institute, which may include, but is not limited to, leading a webcast on the research, presenting the research at an SOA meeting, and/or writing an article on the research for an SOA newsletter.

Conflict of Interest

You agree to disclose any of your material business, financial and organizational interests and affiliations which are or may be construed to be reasonably related to the interest, activities and programs of the Society of Actuaries Research Institute.

Rules for Submission of Essays

Timeline

The deadline for submissions is November 15, 2023. Essays will be published as soon as possible in a formal collection later in the year.

Length and Instructions for Submission

Essays must be submitted in English with a desired length of between 500 to 2,500 words. There is no requirement for formal or extensive footnoting.

Author information must be submitted with the essay and include name; credentials or designations (if appropriate); title; organization/company; e-mail address; and phone number. Please provide all author information at the beginning of the essay.

Essays that contain any overt political statements, commercial content, and other inappropriate material will not be accepted. Articles must comply with the SOA's antitrust guidelines.

Essay Submission

Please submit your essay via e–mail to Research-AR@soa.org.

Awards

Award money has been allocated for this call for essays. The review committee will select the leading essays and determine how to allocate the award money among them. Consideration will be given to creativity, originality and the extent to which an idea might help promote further thought in this area. In exchange for award money, selected authors will be required to assign all copyrights in their essays to the Society of Actuaries Research Institute.

Authors are ineligible for awards if an essay is based on an Institute-sponsored and funded research study conducted by the author. However, authors are welcome to submit such essays for publication consideration.

Publication and Presentation

Depending on how many essays are received and the range of the topic areas, a suitable format for electronic publication and dissemination will be selected. Essays may also be presented at an SOA meeting, webcast, or other professional development event.

In addition, other venues for publication or presentation of the ideas outside of the Institute will be considered. It is hoped that publication of the collected essays will further knowledge and stimulate discussion as well as promote future efforts in this area.

Rights Granted

Please understand that by submitting an essay for consideration, the essay author(s) is granting to the Society of Actuaries Research Institute an unlimited license to print or republish their essay, with proper attribution given to the author(s).

Questions

Please direct any questions regarding this Call for Essays to Research-AR@soa.org.

Appendix

The cost ranges below are intended as a guide for budgeting project costs for proposals in response to SOA Research Institute Request for Proposals (RFP). Please note these figures span the 33rd to 66th percentiles for all projects as well as projects that involve a specific approach (lit review, survey, etc.). They are based on historical costs over several recent years. Expected costs for some RFPs may fall outside these ranges depending on the nature of the work and resources required for completion.

All Contracted Projects

This category includes all contracted projects that the Institute has undertaken within the last several years.

The 33rd-66th percentile project costs range is $25,000 - $50,000.

Literature Reviews

This category includes projects that involved only a literature review or the cost for the portion of a larger project that included a literature review.

The 33rd-66th percentile project costs range is $15,000 - $20,000.

Surveys

This category includes all projects that had a survey as their primary component.

The 33rd-66th percentile project costs range is $28,000 - $55,000.