DB Sponsors Can Learn About De-Risking from Others

April 3, 2012 (PLANSPONSOR.com) - North America’s first pension buy-in deal in May 2011 led many to predict a boom in the pension de-risking market.

Yet while the number of sponsors eager to reduce the risk of their pension liabilities hits an upward curve, plan sponsors continue to question whether they should be more cautious than their counterparts, in the UK and Europe.  

A Clear Path Analysis survey found that 98% of North American pension plans and their company sponsors believe that if the de-risking market is to see significant growth, providers must undertake a full strategy analysis, so they understand and immunize their liabilities effectively. However, liability-driven investing (LDI) fund managers and longevity hedging providers argue that it’s more important to consider developments in other countries, to learn from their mistakes (see “Running the Fund: Risk Shifts”).  

Clear Path’s Pension Plan De-Risking; North America report hears from industry experts on current trends in the marketplace and the options available to them. Scott Gaul, Senior Vice President at Prudential Retirement, considers the growth potential in the market: “From what we see, many companies are holding a disproportionate amount of risk in their pension plans and we feel that it is prudent for businesses to begin the process of de-risking and aligning risk, towards their core investments.”

Valter Viola, head of Pension Risk Solutions at Algorithmics, an IBM Company warns that: “To avoid repeating past mistakes, DB pension plans need an effective and thorough process for making risk decisions. While an aging population provides a good reason to de-risk these days, other reasons for doing so may be worrisome.   

“The recent financial crisis and the ‘perfect pension storm’ that preceded it, characterized by falling stocks and falling interest rates, has been a catalyst for de-risking. The response to these extreme events may be an overreaction to recent pain and is an indication that certain risks need to be better understood, despite evolving accounting standards which make some of these risks more transparent.   

“DB plans need a risk framework to define risk parameters; articulating risk appetites is not easy and the first challenge is that many people do not understand the language of risk very well. DB plans should adopt a practical framework, which develops an explicit risk budget, reports risks more frequently and sets policies at acceptable levels of risk. By doing so, they are less likely to repeat past mistakes. As Keynes warned us, however, this is easier said than done!”  

North America’s first pension buy-in deal was announced in May 2011 by Prudential Retirement (see “Pru Completes Nation’s First Pension Buy-In”).  

To obtain a full copy of the Clear Path Analysis report, e-mail ClearPathAnalysis@humebrophy.com, call +44 (0)20 3440 5656 or go to http://bit.ly/GSaAmp.