DB Survival of Hard Times Means Better Risk-Return Judgments

December 16, 2008 (PLANSPONSOR.com) - A new Hewitt Associates global survey found that companies need to do a lot more to manage their pension risk and potentially weak returns during tough economic times.

A Hewitt news release said most plan sponsors have taken only “small and conservative steps to manage their risk at a time when careful monitoring and measurement and strong, meaningful actions should be the order of the day.”

Hewitt’s survey of 171 plan sponsors in 12 countries also found there are steps employers can take now that will enable them to ensure the long-term health and stability of their pension plans, as well as protect them from volatile market and economic conditions. According to the Hewitt announcement, U.S. employers have yet to employ the full range of tools at their disposal to manage pension risk, such as more sophisticated investment solutions, integrated funding and investment strategies, and liability management techniques.

“While some U.S. companies did take early action to manage pension risk leading up to the current economic situation, a majority of plan sponsors remain exposed to events like those we are experiencing.” said Joe McDonald, head of Hewitt’s Global Risk Services practice in North America, in the news release.

Hewitt said its poll identified “a significant, determined and growing” minority of U.S. sponsors companies that have adopted leading-edged practices that have better positioned themselves to weather volatile economic environments and market conditions. The announcement said these players can be characterized by their attitudes to all aspects of understanding and addressing their pension risks.

The majority of respondents worldwide identified financial risk as the most important (73%). In the U.S., financial risk and regulatory risk ranked highest in importance -most likely due to recent pension legislation, including the Pension Protection Act (PPA) of 2006. More alarming is that governance (12%) and strategic risk (4%) received such low marks, Hewitt said.

Hewitt contends that successful companies view and manage pension risk within the broader framework of the company’s overall risk profile and strategy. Currently, less than one-quarter (24%) of companies view risk in this way.

Other Hewitt Pension Risk Survey findings include:

  • Only 18% of U.S. plan sponsors report benchmarking plan asset performance relative to a liability-based benchmark, while asset-only benchmarks such as market indexes (80%), peer group comparisons (60%), and expected return hurdle rates (54%) all received higher marks. Using a liability-driven benchmark allows sponsors to look at the impact on the plan's funded status rather than assets in isolation, enabling them to make better decisions in seeking risk-adjusted returns for their plans.
  • When asked about factors that influence their attitude toward pension risk, a majority of U.S. companies (82%) cited income statement and cash volatility as the primary driver, while only 16% are focusing on the long-term rewards of risk-taking as the primary influence on their attitude toward risk.
  • Successful plan sponsors are focused on their pension investment and funding strategies. In the U.S. half are considering reducing the asset-liability mismatch in their plans, while 60% intend to establish or revise their funding policy.
  • Many are either considering or have already outsourced much of retirement plan management, such as asset manager monitoring (54%), asset manager selection (40%), Liability Driven Investing (LDI) (20%) or other liability matching techniques (38%), and tactical asset allocation changes (32%).