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Underfunding of Liabilities Seen as Top Pension Risk
 

By Stephen Miller, CEBS  11/22/2011

Market volatility is causing plan sponsors to identify underfunding of liabilities as the most important risk affecting their defined benefit pension plans. However, this risk is reported as only the 11th most successfully managed risk—demonstrating that the importance ascribed to certain risks does not always correlate to success at managing them, according to MetLife's 2011 Comparing Pension Risk Attitudes and Aptitude report, which compares and contrasts the results of the MetLife 2011 U.S. and UK Pension Risk Behavior Studies.

The studies surveyed plan sponsors in the U.S. and trustees in the UK regarding 18 investment, liability and business risks to which their plans were exposed.

Gap Between Importance and Success

The economic downturn and subsequent volatile economic environment are leading plan sponsors to focus more intensely on their plan’s liabilities. “This marks a fairly significant turning point away from seeing absolute asset performance as a key driver of meeting pension obligations and moving to managing assets in the context of plan liabilities,” said Cynthia Mallett, vice president for corporate benefit funding at MetLife, a financial services and employee benefits provider.

Other risks also were identified as highly important but reported to be low in successful management, even though they should garner more attention than risks that are identified as low in importance but reported to be managed successfully. For instance, a mismatch between plan assets and liabilities was ranked as the second highest risk affecting pension plans. However, it was reported to be only the 13th most successfully managed risk in the U.S.

“The good news amid a challenging economic environment is that plan sponsors are tackling the measurement of their liabilities. This is the first step in successfully managing the risks facing their plans,” said Mallett. “Moving forward, we expect plan sponsors to refine and deepen their focus on a core set of risks, and over time to implement new strategies to successfully manage them.”

2011 Risk Factor Importance and Success Rankings

 

Risk Factor

Importance Ranking

Selection Rate

Success Ranking

Underfunding of liabilities

1

66%

11

Asset & liability mismatch

2

60%

13

Asset allocation

3

45%

3

Meeting return goals

4

41%

7

Ability to measure risk

5

35%

12

Accounting impact

6

32%

9

Liability measurement

7

30%

1

Plan governance

8

28%

4 (tie)

Fiduciary risk & litigation exposure

9

22%

15

Decision process quality

10

16%

16

Investment valuation

11

16%

6

Investment management style

12

15%

8

Longevity risk

13

12%

18

Inappropriate trading

14

8%

2

Advisor risk

14

8%

4 (tie)

Quality of participant data

16

6%

10

Mortality risk

17

5%

14

Early retirement risk

18

4%

17

Source: MetLife.

 

Stephen Miller, CEBS, is an online editor/manager for SHRM

Related Articles:

Pension Plan Sponsors See Soaring 2011 Contribution Requirements, SHRM Online Benefits Discipline, October 2011

Pension Funding Hits Post-World War II Low, SHRM Online Benefits Discipline, October 2011

Six Ways to Reduce Pension Costs and Volatility, SHRM Online Benefits Discipline, October 2011

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