Against the backdrop of a volatile stock market, U.S. defined benefit retirement plan sponsors are taking a broader view of the investment, liability and business risks to which their plans are exposed. As a result, most plan sponsors believe that they’re doing a better job implementing risk management measures in 2010 than they had done previously, according to MetLife’s second annual U.S. Pension Risk Behavior Index Study, a survey of 166 corporate plan sponsors from among the 1,000 largest U.S. defined benefit (DB) pension plans.
Focusing on asset value growth over the long term while giving insufficient consideration to the value or timing of liabilities—the likely stream of pension benefits that must be paid—can provide an unrealistic picture of a plan' financial situation and increase the risk of facing a potential shortfall.
Plan sponsors have become more aware of that risk. In 2010, liability measurement (reviewing liability valuations routinely and understanding the drivers that contribute to plan liabilities) and avoiding underfunding of liabilities (designing and executing investment strategies to comfortably manage funding contribution levels) are the risk factors identified by plan sponsors as being the most important, up from numbers six and three, respectively, a year earlier. At the same time, asset allocation and meeting return goals, which occupied the two top spots in 2009, moved down in the importance rankings to number four and number 14, respectively.
Other liability-related risks that were deemed relatively unimportant in 2009 also climbed in importance. In 2010, longevity risk and early retirement risk both ranked 10th in importance, up from 16 and 18, respectively.
“When we examined the year-over-year changes in the ways in which plan sponsors think about and manage pension plan risks, plan sponsors are becoming much more ‘liability aware,’ ” says Cynthia Mallett, vice president, product and market strategies, in MetLife’s corporate benefits funding group, who oversaw the study. “While clearly this shift in focus was spurred by the market environment, it also may signal an acknowledgement that traditional methods of mitigating risk by diversifying the investment portfolio may no longer be viable as a sole or primary means of pension risk management.”
In the face of volatile markets and the slow economic recovery, plan governance has moved up in importance from the ninth-ranked risk factor in 2009 to the third-ranked risk factor in 2010. Advisor risk and inappropriate trading also increased in importance in 2010.
“While engagement doesn’t necessarily translate into success, we’re encouraged by the fact that plan sponsors are taking steps to control and prepare for the risk their plans face,” says Duane Bollert, head of MetLife’s U.S. pensions business. “While certain risks will remain more important than others, it’s critical that plan sponsors develop a risk management plan that fits their individual organization and pension plan.”
Stephen Miller is an online editor/manager for SHRM.
Pensions May Face Unexpected Funding Demands, SHRM Online Benefits Discipline, February 2010
Liability-Driven Investing Strategies Proved Worth, SHRM Online Benefits Discipline, February 2009
SHRM Online Benefits Discipline