Plan sponsors for the largest U.S. defined benefit pension plans, covering nearly 42 million plan participants, report that they focus on only a few risk factors associated with their pension plan, according to a survey by financial services firm MetLife.
The survey polled 168 corporate plan sponsors among the 1,000 largest U.S. defined benefit (DB) pension plans in June through August 2008. The findings, reported in The MetLife Pension Risk Behavior Index, published in January 2009, reveal that:
The risks that receive the most attention are typically asset-centric and easiest to model / measure (i.e., asset allocation, meeting return goals, asset-liability mismatch).
Conversely, the risks that receive the least amount of attention are liability-related: quality of participant data, longevity risk, mortality risk, and early retirement risk.
Plan sponsors have achieved inconsistent success in addressing and mitigating even those risks they deem most important.
“Over time, the approach of focusing on some risks — and ignoring others — could have serious repercussions, including unnecessary volatility in earnings and/or cash flow with the potential to adversely affect the ability of the plans to provide retirement security to plan participants,” says Cynthia Mallett, vice president of MetLife’s Institutional Business, who oversaw the index.
“During the next 12 to 24 months, we expect DB plans to develop a broader view of the risks to which their plans may be exposed as demographic forces, regulatory pressures and market volatility combine to make pension plan management more challenging and more transparent,” she adds.
Measuring 'Importance' vs. 'Success'
In addition to measuring the relative importance of risk factors, the Pension Risk Behavior Index (PRBI) also tracks how well plan sponsors report they are managing each area of risk. Looking at these two measures together, the PRBI shows a significant gap between “importance” and “success.”
"Today’s corporate plan sponsors should be encouraged more than ever to improve the processes by which they identify the full range of short- and long-term risks associated with their plans," says Mallett, adding that "the industry has an opportunity to focus on the importance of developing tools and protocols for managing these risks.”
Room for Improvement
To establish a benchmark for risk management practices, MetLife developed a PRBI score, taking into account the relative importance of each risk and the relative size of each retirement plan. The current PRBI score is 76 out 100.
“The PRBI score leaves significant room for improvement,” says Dev Clifford from Greenwich Associates and Richard Dunne from Bdellium Inc., two researchers who collaborated with MetLife on the PRBI study. “It would be desirable to see every plan sponsor agreeing that they are addressing the risk factors that they believe are most important. While it is unrealistic to expect an index value of 100, a score in excess of 87 is both achievable and desirable.”
“This research should broaden awareness among plan sponsors of risk factors outside their present comfort zone, thereby enabling them to have a more balanced understanding of their plan’s dynamics,” adds Susan Mangiero of Pension Governance Inc., who also collaborated with MetLife on the study.
Stephen Miller is an online editor/managers for SHRM.
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