“In both countries, the current market environment has underscored the need to better understand and effectively manage pension plan risk exposure in order to protect the benefits of current and future retirees. As a result, those responsible for pension risk management in the US and UK are taking a broad, though different, view of various investment, liability and business risks to which their pension plans are exposed,” said Robin Lenna, executive vice president, Corporate Benefit Funding, MetLife, in releasing the report. “In the U.S., this is quite a shift from two years ago when our research revealed that plan sponsors were narrowly focusing on only a handful of risks to which their plans were exposed.”
Significantly, for US plan sponsors the importance of Advisor Risk in the study’s priority ranking suggests that some plan sponsors feel that “they may not be able to rely on their advisors to the same extent they once did when consulting assignments were more standardized,” according to the report.
To assess the current state of pension risk management, MetLife in the US and MetLife Assurance Limited in the UK commissioned research earlier this year of US plan sponsors and UK scheme sponsors and trustees, respectively. A new report released today, Comparing Pension Risk Attitudes and Aptitude in the United Kingdom and United States, juxtaposes the findings of two studies, the MetLife US Pension Risk Behavior Index and the MetLife Assurance UK Pension Risk Behaviour Index.
As part of that original research, MetLife developed a Pension Risk Behavior Index (PRBI) value, which calibrates the importance that the survey respondents ascribed to each risk, their self-reported success at implementing comprehensive practices to manage each risk and the consistency between the two, effectively measuring both attitudes toward, and aptitude for, managing pension plan risks. Comparing the values, the PRBI Index in the UK (78 out of 100) is virtually identical to the US (79 out of 100) which, according to the report’s authors, indicates that plan sponsors in both countries do a comparable job overall, albeit as a result of different drivers, and indicates that they report to be successfully managing the risk factors that they deem most important.
That said, while the Index scores for both the US and the UK are virtually identical, their priorities when it comes to ascribing importance to certain risks vary significantly, according to the report. Collectively, the five risk factors ranked highest in importance in the UK were Measurement of Technical Provisions/Liabilities, Longevity Risk, Employer Covenant, Investment Management Style and Funding Deficits, whereas in the US the “most important” risk factors were Liability Measurement, Underfunding of Liabilities, Plan Governance, Asset Allocation and Advisor Risk.
There are some notable differences in the importance rankings between the UK and US, according to the researchers. For example, Longevity Risk is much higher in importance in the UK (tied for #2); whereas in the US, it’s only ranked #10 in importance; Plan Governance ranks #3 in the US while its UK counterpart, Scheme Governance, is ranked #12.
"The differences in importance ascribed to various risks among US and UK pension managers highlight the dissimilar nature of the two pension markets. In the UK, Longevity Risk is much more of a concern, likely because of the UK's more common inflation adjusted pension structure, as the cost of indexed pensions is much more susceptible to changes in life expectancy than a fixed nominal pension," said Cynthia Mallett, vice president, Corporate Benefit Funding, MetLife. "And in the US, the importance of Advisor Risk suggests that some plan sponsors feel that they may not be able to rely on their advisors to the same extent they once did when consulting assignments were more standardized."
Respondents to both studies were also asked to indicate the extent to which they agreed that they managed each risk factor successfully. According to both studies, plan sponsors in the US and scheme sponsors and trustees in the UK both gave themselves high marks for successfully managing risk overall. In the US and UK, respectively, 79% and 80% of the respondents believe they are successfully managing risk.
However, not all risk factors that were deemed most important were rated as successfully managed. In fact, there are several risk factors among both US and UK sponsors that are classified as high importance, but fall into the low success category. In the US, those included Underfunding of Liabilities, Fiduciary Risk & Litigation Exposure, Ability to Measure Risk, and Asset & Liability Mismatch. As for the UK, those areas included Longevity Risk, Investment Risk Profiling, Inflation Risk, Funding Deficits, Asset & Liability Mismatch, and Meeting Investment Return Targets.
"In an ideal world, plan sponsors and trustees in both countries would be highly successful at managing the most important risk factors. These differences show room for improvement when it comes to plan sponsors on both sides of the Atlantic managing risk exposure to protect the benefits of current and future retirees,” added Mallett.
The new report is available for download at www.metlife.com/pensionriskusuk.
A complete report of the findings for the MetLife US Pension Risk Behavior Index (and detailed description of the research methodology) is available at www.metlife.com/pensionrisk. The MetLife Assurance UK Pension Risk Behaviour Index (and detailed description of the research methodology) is available at www.metlifeassurance.co.uk.