After MetLife released the first PRBI in 2009, the 2013 index value is 87, the highest value recorded since the study was introduced. This value shows that the consistency between the importance plan sponsors ascribe to the risks facing their defined benefit (DB) pension plans and how successfully they believe they are managing those risks has improved. In its first study, MetLife stated that while it was “unrealistic to expect to achieve an Index value of 100, a target of 87 would not be unreasonable.”
A key finding of this year’s PRBI study is that many plan sponsors of the largest DB pension plans are already acting, or planning to take action, to reduce, mitigate and/or transfer risks affecting their plans.
“While plan sponsors may still be grappling with how best to maintain minimum funding levels at a time when benefit obligations are climbing, recent de-risking moves by several major U.S. corporations may be paving the way for additional companies to consider a similar approach for their plans,” said Ed Root, vice president, U.S. Pensions, Corporate Benefit Funding, MetLife.
When asked if they were planning to take a similar approach, four in 10 plan sponsors (38%) indicated that they are planning to take action of some kind. They say they are doing so primarily because they want to reduce their liabilities, funded status volatility, contributions, pension expense and/or the cost of plan administration so that they can focus on their core business.“De-risking—whether it’s through a partial risk transfer, pension buyout or some other risk mitigation strategy—can go a long way in achieving these objectives,” Root added.
Plan sponsors also reported that they are keeping a close eye on the impact of their plans’ liabilities on their companies’ balance sheets. Eight in 10 (82%) plan sponsors have quantified the present value of their company’s pension obligation relative to their organization’s size—as measured by market capitalization, annual revenues, total capital or other similar metrics. Nearly six in 10 plan sponsors (58%) indicated that their senior leadership pays very close attention to these obligations.
Other notable findings from the 2013 PRBI study include:
- Underfunding of liabilities, as well as asset and liability mismatch, continue to rank as the first and second most important risk factors to plan sponsors, respectively. This liability-related focus, which has been consistent for the past three years, is juxtaposed with the first PRBI study in 2009, when two investment-related risks—asset allocation and meeting return goals—topped the importance rankings.
- Self-reported success ratings, which measure how strongly plan sponsors agree with statements that describe successful management of each of the 18 risk factors, reached an all-time high. More than eight in 10 (85%) of all ratings indicated success, compared with 75% in 2009, indicating that plan sponsors believe they are successfully implementing comprehensive measures to manage each risk item.
- Liability measurement retained the number-one success ranking for the fourth year in a row, indicating that plan sponsors have made reviewing liability valuations and understanding the drivers that contribute to their plans’ liabilities, including how the liability profile may change over time, a consistent priority.
- In the wake of accounting rule changes, funding changes and more disclosure requirements, plan sponsors say they believe that fewer regulations, and more clarification, would be helpful in maintaining their DB plans. Plan sponsors say that if policymakers are going to take action, they believe that a more favorable interest rate environment, lower Pension Benefit Guaranty Corporation (PBGC) premiums, and certain changes to accounting rules such as simplification, a reduction or elimination of the impact of settlement accounting, and stabilizing interest rates used for accounting valuations, would be helpful.
“The findings of the 2013 U.S. PRBI answer one of the burning questions in the industry about pension risk management: Would this new risk framework that focuses on both the asset and liability sides of the pension risk management equation—as well this level of attention to pension plan management—be temporary, persisting only as long as the economic downturn was acute and then rebounding with the equity markets, or would it be sustained?” said Cynthia Mallett, vice president, Industry Strategies and Public Policy, Corporate Benefit Funding, MetLife, who supervised the research. “Based on the findings of our study, the answer is clear: a long-term fundamental change in perception about the nature of pension risk management has occurred.”
Moving forward, Mallett added, Metlife expects that this balanced and integrated approach will continue to provide a sustainable basis for the decisions made and actions taken.
The PRBI study was conducted by Bdellium Inc. and Greenwich Associates between October 2012 and January 2013. Commissioned by MetLife, the 2013 study surveyed 126 large plan sponsors (of which 95 reported DB assets of more than $1 billion). Interviews were done by telephone with a Web-assisted option. Respondents were senior financial professionals whose primary focus is pension investments, risk management or employee benefits, in addition to corporate management. The study measured plan sponsors’ aptitude for managing (and attitudes about) 18 investment, liability and business risks to which their plans are exposed.The complete findings of the study, as well as descriptions of the aforementioned 18 risks and the research methodology, can be found here.