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Are You Factoring Pension Risk Into Planning? Defusing the Pension-Savings Time Bomb

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W H I T E PAPERS WORDS OF AUTHORITY Are You Factoring Pension Risk Into Planning? Defusing the Pension-Savings Time Bomb Rick Jones, FSA, EA, Senior Partner, Aon A round the world, the retirement and pension savings gap—the difference between the amount of money people will need in retirement and the amount of money that is being saved—is a source of constant headlines and concern. The current environment of low interest rates and investment returns, sluggish wage growth and inadequate private savings is creating a retirement-funding problem. While this has enormous implications for everyone, retirement plan sponsors must start taking action now. Why does this matter? It's estimated that 10,000 American baby boomers retire every day. An aging population presents significant challenges. Expenditures could rise due to the growing costs of providing pensions, health and social care. In this environment of rising costs and risks, plan sponsors are turning to new ways to reduce pension liabilities. What can employers do? In the event a provider fails to deliver on pension obligations, the federal Pension Benefit Guarantee Corporation insures corporate pensions. However, a range of factors—including post-financial- crisis regulation and pension- portfolio returns being offset by decreasing interest rates and life- expectancy increases—have driven up defined benefit-pension-fund costs and liabilities. From encouraging employee accountability to better managing the risk, new strategies for employers will be required. This can include: • Making lump-sum offers to future retirees. In our 2017 Pension Risk Survey, we found that 43 percent of U.S. firms have offered buyouts to future plan beneficiaries. • Shifting obligations for existing retiree groups, or entire plans, to insurance companies. How to do it? Implementing changes to a pension strategy involves HR managers, and any decision to reduce pension liabilities will need buy-in across the company. The Aon 2017 Global Pension Risk Survey revealed that visibility and control of a company's pension risk has become a board-level concern and new tools are being used to reduce risk. Questions to ask: • Are you confident in your company's readiness to fulfill its pension obligations? • How would you describe your appetite for risk and volatility in your pension plan and its finances? • Do you plan to make additional cash or stock contributions to fund existing pension obligations ahead of minimum required amounts? • Do you have the bandwidth and skillsets to manage these evolving pension strategies? • Are you aware of how other plan sponsors are reducing their pension liabilities without affecting participants? Aon strives to help clients navigate the complexities of the cost and risk associated with pension plans. We advise clients on the design of their retirement program and suggest different forms it should take to address the needs of their organization, employees and retirees. We are dedicated to delivering custom solutions that fulfill obligations but also reduce risk for future generations. For more information, contact retirement@aon.com. M a r c h 2 0 1 8 19 SPECIAL ADVERTISING SECTION

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