Pension Plans Focusing More on Risk Management

Respondents in the U.S., Canada, and Europe said that the top four lessons they learned from the financial crisis were the need for more downside protection (62%), improved risk management (54%), a better match of assets and liabilities (49%), and a realization that they were less diversified than they thought (42%).  

The top concern cited by pension plan sponsors was their current funded status (23%), followed by volatility (21%) — either volatility of a plan’s funded status or asset volatility– and a low-investment-return environment (19%).   

According to a press release, in the U.S., the top concern among corporate plans was the volatility of their funded status, while public plans are most concerned with their current level of their plans’ funded status. “Solvency ratio,” which is a financial strength measure of Canadian pensions, was cited by 23% of plans responding in that country.   

In the U.K. and Northern European countries, the top concern was a low-investment-return environment. The exception was the Nordic countries – Finland, Ireland, Sweden, Norway and Denmark – which cited risk management as their top concern (36%).  

The press release said plan sponsors across the regions differed in their definition of volatility, which influences the investment strategies they are pursuing and their views of risk. U.S. corporate and Canadian public pension plans define volatility as funded status or solvency ratio volatility, respectively. The survey found they often seek to better match assets and liabilities to protect funded status.   

Conversely, U.S. public and Northern European pensions, which define volatility as asset volatility, intend to broaden diversification — as a return enhancer and risk reducer – to include more global equity and alternative assets. In addition, they expect to offer more investment committee education and streamline decisionmaking to execute timelier asset allocation decisions.  

Pyramis conducted surveys of institutional investors during June and July 2010, including 249 U.S. pension plans (159 corporate, 90 public), 79 Canadian pension plans (47 corporate, 32 public) and 138 U.K. and Northern European institutional investors (57 private, 43 public, 30 multi-managers, eight insurers) in 11 countries (33 Netherlands, 32 U.K., 27 Switzerland, 14 Sweden, 13 Denmark, seven Germany, and 12 in five other countries). The surveys were executed in association with Asset International, Inc., in the U.S., the Canadian Institutional Investment Network, and the Financial Times in the U.K. and Northern Europe.