DB Sponsors Have Risk on their Minds

December 10, 2009 (PLANSPONSOR.com) – A Hewitt Associates survey of large U.S. employers finds defined benefit plan sponsors have shifted their risk management programs into high gear compared to 2008.

A Hewitt news release said most of the large-sized corporate respondents say they have changed the way they fund, invest, and design their pension plans. Hewitt says this is a major shift from last year when sponsors were primarily focusing on small and conservative steps to protect themselves from volatile economic conditions.

According to data from the latest poll, almost 40% of plans have cut their equity exposure and many are increasing their fixed income allocation with assets that better match liabilities, such as corporate bonds (37%) and/or treasury bonds (19%). There is also a growing number of U.S. companies (15 %) implementing dynamic investment policies, a new framework that defines an asset rebalancing strategy that changes as the plan’s funded ratio improves.

Thirty-one percent of respondents said they are more likely to consider closing their plans today than they were 18 months ago, compared to 11% of companies in 2008. A similar trend exists for plan freezes, with 50% of companies now more likely to consider freezing their plans to existing participants, up from just 17% in 2008.

Also, according to the survey, 51% of companies have outsourced the performance monitoring of their investments or are more likely to do so compared to18 months ago. Forty-one percent said they have outsourced liability-hedging strategies or are more likely to do compared to 18 months ago. Further, companies are five times more likely than last year to consider delegating their entire investment policy to professional advisers, from 4% in 2008 to 20% in 2009.

Monitoring and Measuring Risk

In general, Hewitt’s survey shows that 78% of large U.S. employers have either started to monitor the financial risk in their pension plans or have increased how often they measure it.

However, most companies still focus on asset-only benchmarks to measure how successfully they are managing their plan assets. Pension plan liabilities generally receive far less attention and they are rarely reviewed as frequently or consistently as asset-only benchmarks. The survey found that 12% of companies use the growth in their liabilities as the primary way they measure success of their plan’s assets.

In addition, most U.S. companies surveyed (83%) expect to make additional contributions to their pension plans. Among these companies, 11% indicate that the additional contributions will have a significant impact on their business and more than half (51%) say the impact will be material but manageable.

Sixty-six percent expect to fund their pension plans to at least 80% to meet the new threshold requirements under the Pension Protection Act (PPA) and avoid triggering benefit limitations.