Pension Funds Step up Risk Management

August 25, 2009 ( - Sixty-two percent of pension funds have stepped up their fiduciary risk management practices since June 2008 and the same number will have tested their ability to meet future funding requirements by the end of 2009, a new study has found.

A Watson Wyatt news release said only 12% will have established a risk advisory committee by the end of 2009. 

Overall, 67% of companies have made or are planning to make policy changes in 2009 and 2010 to their defined benefit asset allocations. By 2010, these organizations project that they will have slashed their target equity allocations by nearly 10 percentage points to 47.8% and 73% have hired or fired managers since June 2008 — 52% having both hired and fired managers

Watson Wyatt said the survey findings support the notion that risk management has firmly taken center stage in the DB world after the recent economic turmoil.

“This activity is a seismic shift from business as usual,” said Carl Hess, global director of investment consulting at Watson Wyatt, in the news release. “The uptick in activity could be a sign that many funds were caught off guard by the crisis and are now trying to mitigate their risk exposure.”

The survey also found mixed results in terms of measures employers are taking to improve their DB governance strategies. For example, fewer than half (41%) will have implemented cost-cutting strategies by the end of 2009.

Meanwhile, according to Watson Wyatt, employers have also been making changes to the investment lineups of their defined contribution (DC) plans. More than half (56%) have already made changes since June 2008 or are planning to by the end of 2009. Nearly half (45%) of companies added new U.S. equity funds to their lineup, while 62% dropped an existing U.S. equity fund.

Other findings included:

  • The vast majority (93%) of companies offer a default investment option in their DC plan. Of these companies, 71% offer a target-date fund.
  • One in five (20%) companies have either already made or plan to make changes to their target-date funds, despite the relative newness of these products. Of these companies, 11% have chosen to apply more conservative strategies, 42% have made changes to lower costs, and 32% have made changes to build custom strategies.

The Watson Wyatt survey was conducted in August 2009, and includes responses from 85 senior-level financial executives from large, U.S.-based companies.

For more information, visit .