A Hewitt news release said most companies have taken only conservative risk management steps even in the face of weak economic conditions and poor market returns with the issue being particularly pressing in Canada, which survey results indicate has the highest proportion of DB plans open to new entrants compared to other countries.
The impact on a plan sponsor’s financial resources is so significant that organizations, particularly in Canada, are moving pension management out of human resources and under the management of their finance teams.
“The current financial environment underscores the need for organizations to manage retirement risk in the same way they handle general business risk—by determining their risk tolerance and being vigilant,” said Rob Vandersanden, a senior pension consultant in Hewitt’s Calgary office, in the news release.
In terms of the factors that influence a company’s attitude towards managing pension risk, accounting issues dominate globally, principally in terms of the impact on the profit and loss statement, Hewitt said.
Survey respondents were asked about the measures they use to quantify their risk exposure and how frequently they measure risk. Hewitt found:
- Pension risk is still typically looked at in isolation, with nearly half of responses supporting this view. About one in six respondents indicated that pension risk is considered in the context of their overall enterprise risk budget.
- More than one half of participants use asset liability modeling to determine their pension risk. In addition, one third also look at numerical values for pension risk drawn from deterministic shocks (for example, a 20% fall in equities) and another one third use a Value at Risk metric on a local or global basis.
- A third of Canadian participants say they have no formal quantified measure of their pension risk.
- The most typical risk monitoring pattern for Canadian organizations is a quarterly update on asset values, but an annual update of liability values, and risk measures (45% of Canadian respondents) is also common. However, the frequency of risk monitoring may have increased in recent months with higher market volatility.
- Some respondents said they are moving away from conventional holdings of equities towards more liability matching solutions and alternative investments, such as real estate, hedge funds, commodities, private equity, and infrastructure.
Since the start of the credit crunch in the last quarter of 200, global pension assets have plummeted $4 trillion, according to Hewitt
Hewitt conducted a survey of 171 plan sponsors in 12 countries in the summer of 2008.