Mercer Releases Tips for Plan Sponsors on Pension Risk Management

January 10, 2012 (PLANSPONSOR.com) – Mercer released what its team believes to be the five most important pension risk management steps for U.S. pension plan sponsors. 

PLANSPONSOR spoke with Jonathan Barry, partner in Mercer’s Retirement, Risk and Finance business. He said Mercer has a group that spends a good amount of time on pension risk issues, and “these are the things we have seen that have worked in helping plan sponsors manage pension risk.”

He added, “For sponsors who don’t like what they are seeing, we thought it was worthwhile for them to see what is working for others.”

The five items plan sponsors should be doing in regards to pension risk management include:

1) Review the plan’s funded status as part of your regular plan reporting. 

Barry said, “Plan sponsors over the years have gotten used to every once in awhile having their actuary tell them their funded status. That was fine, but now with the volatility we are seeing, and the pension rules, we suggest they look at it more frequently."

The Mercer report says most plan sponsors review investment performance on a quarterly basis. With the increased linkage between assets and liabilities, plan sponsors should consider including the plan’s funded status. This type of funded status monitoring is not merely looking at the ratio of assets to liabilities, but also includes a reconciliation of funded status from period-to-period, attributing any movements in performance, and contributions and benefit payments.

2) Understand the range of possible outcomes to which your pension plan exposes your organization. 

With the volatility experienced in recent months, now is a critical time for plan sponsors to forecast the potential outcomes of their plan’s funded status on key financial measures, such as cash, expense and balance sheet adjustments. Funding requirements coming out of the Pension Protection Act of 2006 will mean a substantial increase in cash funding requirements in 2012 due to having to meet a full-funding target, generally over a seven-year period, with liabilities being discounted using a shorter-term interest rate.