Mercer Gives Pension Risk Management Tips

December 6, 2012 ( – Mercer identified five top pension risk management priorities for 2013.

Many plan sponsors will enter 2013 facing significant increases in their pension funding deficits, causing potential balance sheet adjustments and higher P&L expense, according to Mercer. Mercer’s top five top pension risk management priorities for 2013 are:

Review your plan’s funded status frequently as the foundation for establishing outcome-oriented goals. Funded status monitoring should include an analysis of all the factors that affect the ratio of assets to liabilities, including interest rate and credit spread movements, equity performance, as well as contributions and benefit payments. This is a first step in understanding the underlying health of a plan’s funding position and identifying the factors that could impact the plan in 2013 and beyond.

Understand how the range of possible market conditions and changes in funding status could affect the corporation’s cash flow, balance sheet and reported earnings. Now is the time to conduct the “what if” scenario analysis for 2013 and beyond and continue to assess whether to take advantage of the funding flexibility offered by MAP-21. While the legislation provides temporary relief related to the timing of contributions, it does not reduce the true economic value of pension liabilities, and it also increases Pension Benefit Guaranty Corporation (PBGC) premiums significantly.

Develop a formal de-risking plan. There have been several opportunities since 2000 to take risk off the table as funded status improved. However, most sponsors did not take advantage of these market windows because they did not have a plan in place for when to reduce overall plan risk, nor did they have the time, resources or specialized investment expertise. Sponsors should develop a roadmap to de-risk the plan that can be executed quickly, as and when opportunities arise, that might include plan design changes, investment allocation movements, fixed-income portfolio construction and risk transfer components.

Consider liability transfer options. General Motors and Verizon both entered into landmark annuity purchases in 2012 that introduced game changes to the risk transfer landscape. In addition, a number of major plan sponsors have offered cashout options to their former employees (“terminated vesteds”) and in some cases have offered cashout options to current retirees. Mercer expects that this trend will accelerate in 2013 and beyond. Advantages of risk transfer strategies include reduction of funded status volatility from mark to market gains and losses as well as the opportunity to reduce plan expenses arising from PBGC premiums, administration and investment costs. Sponsors planning to implement these strategies in 2013 should begin planning now to maximize the effectiveness of the program.

Review your governance structure and decision-making process. Developing a plan creates the framework, but executing and implementing investment decisions can be challenging and resource intensive. Since market volatility can create opportunities that last for only a brief time, adopting an appropriate governance model is critical. This should include an assessment of current resources, as well as any additional tools and resources that may be required within a de-risking framework. With increased focus on funded status and timely asset allocation shifts based on triggers, this may include delegation of investment monitoring and execution to a third party who can measure asset and liability values daily and then act quickly to take advantage of these opportunities.

“The pressure on income statements and balance sheets for many organizations is the result of a continued decline in interest rates, coupled with relatively modest equity growth over the past four years,” said Richard McEvoy, leader of Mercer’s Financial Strategy Group in the U.S. “As we approach year-end 2012, we are in a market environment in which interest rates remain stubbornly low with little sign of significant increase in the near future, and where volatile equity market conditions can whipsaw plan asset levels. Plan sponsors, who are concerned with the effect pension volatility has on their key financial metrics, need to put in place a robust risk management plan that will allow them to quickly react to market changes and take advantage of opportunities to de-risk their plans.”