By Theresa Minton-Eversole and Stephen Miller
Companies worldwide have not done enough to better manage pension risk in light of the global economic downturn, according to a study by consultancy Hewitt Associates.
Since the start of the credit crunch in the last quarter of 2007, pension plan assets on a global level have plummeted by $4 trillion—three times greater than the amount of money provided in government bailouts to global financial institutions. Against this background, Hewitt conducted a survey of 171 plan sponsors in 12 countries to determine their attitudes and actions around managing pension risk.
Overall, most have taken only small, conservative steps to manage their risk at a time when careful monitoring and measurement—and strong, meaningful actions—should be the order of the day, Hewitt's study revealed.
Pension Protection ‘Best Practices’
On a positive note, a significant, determined and growing minority of companies have adopted leading-edged practices to weather volatile economic environments and market conditions, according to Hewitt. These practices include:
- Embedding pension risk in an overall risk framework. Successful companies view and manage pension risk within the broader framework of the company's overall risk profile and strategy. Currently, less than one-quarter (24 percent) of companies view risk in this way.
- Measuring risk against clear and consistent metrics. It is critical to implement clearly defined, consistent metrics that evaluate the interaction of pension assets and liabilities. Using a liability-driven benchmark allows sponsors to look at the impact on the plan's funded status rather than assets in isolation, enabling them to make better decisions in seeking risk-adjusted returns for their plans.
- Balance short-term volatility with long-term goals. “Many companies see risk as being a short-term issue and often a short-term accounting problem,” said Paul Garner, principal in Hewitt's International Benefits Consulting practice. “Successful plan sponsors will be those that achieve balance between short-term fluctuations and long-term goals.”
Pension Risk Myopia?
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 from 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,” said 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 added.
Stephen Miller and Theresa Minton-Eversole are online editors/managers for SHRM.