DB Sponsors Focus on Risk over Returns

September 9, 2008 (PLANSPONSOR.com) - More than 75% of senior finance executives across the United States and Canada said they plan to focus on reducing risk in their defined benefit (DB) pension portfolios, rather than seek greater return on assets, according to the second CFO Research Services study conducted in conjunction with Towers Perrin.

According to a press release, the survey found companies have managed their asset portfolio risk by altering their equity portfolios, investing in alternative assets and optimizing their fixed-income portfolios. Twenty-seven percent of respondents noted that liability-based asset management prevails as the most common risk reduction strategy (See Plans Increasingly Use LDI Strategies but Lack Understanding ). Only 21% indicated pension risk management is closely coordinated with a broader risk management framework.

The focus on risk is one of several factors causing defined benefit plan sponsors to rethink their pension plan designs. Nearly half of all respondents (45%) said performance of the economy or financial markets was the external event that contributed most materially to the decision-making process in DB plan design since 2000.   Additional factors cited by respondents included competitors’ pension offerings (40%), changes in retirement program regulations (37%), increased investor demand for profits and financial strength (18%), and increased scrutiny of risk management practices, the press release said.

Since 2000, the majority of company executives surveyed have made incremental changes to alter their DB plan designs.   Thirty-six percent of respondents said they have closed existing DB plans to new employees while continuing benefit accruals for current employees, and more than a quarter (28%) said they replaced DB plans with defined contributions plans.  

While survey respondents noted there will likely be more incremental changes to come for DB plans, two-thirds (67%) of companies are not likely to terminate them in the next 24 months.

The study includes a comparison of survey respondents’ opinions with publicly available pension data of respondents’ companies.   In March 2008, CFO collected the opinions of 214 senior finance executives across the United States and Canada with DB pension plans, and whose annual revenues range from $100 million to more than $20 billion.  

The full study is available at www.cfo-research.com or www.towersperrin.com .