Mercer Releases Tips for Plan Sponsors on Pension Risk Management

January 10, 2012 ( – Mercer released what its team believes to be the five most important pension risk management steps for U.S. pension plan sponsors. 

PLANSPONSOR spoke with Jonathan Barry, partner in Mercer’s Retirement, Risk and Finance business. He said Mercer has a group that spends a good amount of time on pension risk issues, and “these are the things we have seen that have worked in helping plan sponsors manage pension risk.”

He added, “For sponsors who don’t like what they are seeing, we thought it was worthwhile for them to see what is working for others.”

The five items plan sponsors should be doing in regards to pension risk management include:

1) Review the plan’s funded status as part of your regular plan reporting. 

Barry said, “Plan sponsors over the years have gotten used to every once in awhile having their actuary tell them their funded status. That was fine, but now with the volatility we are seeing, and the pension rules, we suggest they look at it more frequently.”

The Mercer report says most plan sponsors review investment performance on a quarterly basis. With the increased linkage between assets and liabilities, plan sponsors should consider including the plan’s funded status. This type of funded status monitoring is not merely looking at the ratio of assets to liabilities, but also includes a reconciliation of funded status from period-to-period, attributing any movements in performance, and contributions and benefit payments.

2) Understand the range of possible outcomes to which your pension plan exposes your organization. 

With the volatility experienced in recent months, now is a critical time for plan sponsors to forecast the potential outcomes of their plan’s funded status on key financial measures, such as cash, expense and balance sheet adjustments. Funding requirements coming out of the Pension Protection Act of 2006 will mean a substantial increase in cash funding requirements in 2012 due to having to meet a full-funding target, generally over a seven-year period, with liabilities being discounted using a shorter-term interest rate. 

3. Develop a formal de-risking plan 

There have been several opportunities since 2000 to take risk off the table as funded status improved. Yet most sponsors did not take advantage of this opportunity, as they did not have a plan in place to know when to reduce overall plan risk, nor did they have the time, resources and specialized investment expertise. Sponsors should develop a roadmap to de-risk the plan that can be executed quickly as and when opportunities arise. Barry said in order to create a roadmap to de-risk the plan, plan sponsors need to understand how much risk they have and then work from there to develop changes to slow down liability growth.

4. Explore liability transfer strategies. 

Lump sum cash-outs for terminated vested participants, annuity buy-ins and buy-outs are viable options for many plan sponsors. However, analyzing and implementing these strategies takes collaboration from both the finance and human resources sides of the organization. Sponsors looking to implement these strategies in either 2012 or 2013 should begin planning now to help maximize the effectiveness of the program. 

5. Review your governance structure and decision-making process. 

Developing a plan is easy, but executing and implementing investment decisions is difficult. Market volatility can create opportunities that only last for a couple of days. Consideration of the appropriate governance model for each plan sponsor is critical, and might include delegation to a third party who can measure asset and liability values daily and then act quickly to take advantage of these opportunities. Barry added, one thing Mercer has found is that sometimes the traditional government structure my not be effective for a plan. “If you are moving to strategies that require more frequent decisions be made, then you need to decide if a third party is appropriate for that,” said Barry.