Benefits

DB Risk Management Priorities for 2014

By Kevin McGuinness editors@plansponsor.com | December 19, 2013
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December 19, 2013 (PLANSPONSOR.com) – Consulting firm Mercer offers a list of 10 pension risk management priorities for defined benefit (DB) plan sponsors to consider in 2014.

1) Consider taking your de-risking glide path to the next level with interest triggers as well as funded status triggers. 

Many plan sponsors have adopted de-risking glide paths with an increased allocation to assets that provide a hedge against liabilities. The majority of the glide paths have triggers based on funded status, with some plans also adopting interest rate triggers. Mercer anticipates plan sponsors will continue to use a two-pronged approach, with an increased emphasis on interest rate triggers given expectations of tapering by the Federal Reserve in 2014, and the potential for an increase in the level of interest rate volatility. This approach would help plan sponsors lock in interest rate increases when they occur.

Also, a number of plan sponsors are introducing time-based triggers. This pertains mostly to plan sponsors looking to terminate the pension plan within a specific time frame. Mercer also expects to see greater interest in these types of triggers as more plans seek to terminate.

2) Review the optimal LDI (liability-driven investing) benchmarks for liabilities.

Pension plans that have a substantial allocation to liability hedging assets in their portfolios should ensure that the choice of bond benchmarks fits the liability characteristics. This will be an important theme in 2014 and Mercer anticipates an increasing number of plans will explicitly set the benchmark to the plan liabilities.

3) Don’t forget about derivatives.

Pension plans utilizing LDI have increased their exposure to liability hedging assets as funded status has improved. However, physical securities may not be sufficient to manage interest rate risk, or may be an inefficient use of capital, and more plan sponsors will begin to deploy the use of derivatives. Mercer anticipates an increased use of interest rate derivatives in 2014.