According to MetLife’s second annual U.S. Pension Risk Behavior Index Study, a survey of 166 corporate plan sponsors from among the 1,000 largest U.S. defined benefit (DB) pension plans, plan sponsors are now taking a much broader view of the 18 investment, liability and business risks to which their plans are exposed.
The study’s authors say that is reflected in a sense by respondents that they’re doing a better job implementing risk management measures this year than they did last. That said, despite that broadened view and a greater self-ascribed success, the gap between the risk factors plan sponsors identify as “important” – and their reported “success” at managing those risk factors – has widened considerably.
According to the study, plan sponsors are no longer largely concentrating on the asset side of the asset-liability equation – a major change from 2009. The study notes that liability-related risks – which were all but ignored just one year ago – have now taken on much greater importance. In fact, this year, Liability Measurement (routinely reviewing liability valuations and understanding the drivers that contribute to plan liabilities) and the Underfunding of Liabilities (designing and executing investment strategies to comfortably manage funding contribution levels) were the two risk factors identified by plan sponsors as being the most important. A year ago, they were ranked sixth and third, respectively.
Those concerns displaced Asset Allocation and Meeting Return Goals, which occupied the two top spots in 2009, and which this year slid lower in the importance rankings, to fourth and 14, respectively.
Other liability-related risks, which were deemed relatively unimportant in 2009, also climbed in importance this year. Last year, plan sponsors saw Early Retirement Risk, Mortality Risk and Longevity Risk as relatively insignificant risks. However, Longevity Risk and Early Retirement Risk are now both ranked tenth in importance, up year-over-year from 16 and 18, respectively.
“When we examined the year-over-year changes in the ways in which plan sponsors think about and manage pension plan risks, plan sponsors are becoming much more ‘liability aware,’ as we predicted in last year’s study,” said Cynthia Mallett, vice president, Product and Market Strategies, in MetLife’s Corporate Benefits Funding group, who oversaw the study. “While clearly this shift in focus was spurred by the market environment, it also may signal an acknowledgement that traditional methods of mitigating risk by diversifying the investment portfolio may no longer be viable as a sole or primary means of pension risk management.”
This year’s U.S. Pension Risk Behavior Index Study also found that as plan sponsors’ priorities shift, so do their risk management and risk mitigation needs. In the face of rapid external changes brought about by economic turmoil, Plan Governance has moved up in importance from the ninth-ranked risk factor in 2009 to the third-ranked risk factor in 2010. Advisor Risk and Inappropriate Trading also increased in importance.
In what MetLife characterized as the “democratization” of risk factors, between 2009 and 2010, the differential between the risk factors selected as “most” and “least important” narrowed substantially. According to the study, the range between the “most” and “least important” risk factors was just 8% in 2010 – compared to 51.5% in 2009.
While plan sponsors deemed nearly all 18 risk factors as somewhat important in the most recent study, the year’s top risk factors include:
- Liability Measurement (selected 29% of the time),
- Underfunding of Liabilities (selected 28% of the time),
- Plan Governance (selected 28% of the time) and
- Asset Allocation (selected 27% of the time).
Despite a difficult year due to the uncertainty of the market, plan sponsors report they’re doing a better job implementing risk management measures this year than they did last. In fact, year-over-year, their self-ascribed success rating increased for 14 of the 18 risk factors, it decreased for three risk factors and remained unchanged for one risk factor, according to the report. That said, Mallett cautioned that “…in this case, this perception may be driven more by expanded engagement than it is by reality in practice. In fact, the gap between the risk factors that plan sponsors report as ‘important,’ and their ‘success’ at managing those risk factors, has actually widened considerably.”
“While engagement doesn’t necessarily translate into success, we’re encouraged by the fact that plan sponsors are taking steps to control and prepare for the risk their plans face,” said Duane Bollert, head of MetLife’s U.S. Pensions business.
“As the markets recover and plan sponsors become more confident in their ability to assess the expanded range of potential risks, we expect to see the pendulum move back toward the center, where sponsors differentiate among risks to a greater degree and become better able to address these core risks. We also think it’s likely that a balanced view of asset and liability related risks will become common to most sponsors,” noted Mallett in a press release.
The MetLife U.S. Pension Risk Behavior Index was conducted in conjunction with three research partners – Greenwich Associates, Bdellium Inc. and Asset International – during the period of August through November 2009. The MetLife U.S. Pension Risk Behavior Index consists of a quantitative telephone survey of 166 large plan sponsors (94 of which reported defined benefit assets of more than $1 billion), supplemented by a series of in-depth individual interviews and rigorous statistical analysis. The quantitative portion of the study addressed 18 different investment, liability and business risks faced by DB plan sponsors.
A complete report of the findings for the MetLife U.S. Pension Risk Behavior IndexSM (and detailed description of the research methodology) is available at http://www.metlife.com/pensionrisk.
« New Online Interview Site Streamlines Hiring Process