In a study based on the perspectives of some 174 senior finance executives titled, “Pension Plan Risk: Using the calm before the next storm,” CFO Research Services and Towers Perrin note that respondents don’t necessarily want to freeze or terminate their defined benefit plans. In fact, the study’s authors note that many said they have no plans to curtail or eliminate their defined benefit offerings, reserving such measures for more “extreme conditions.”
In fact, they note that this research program suggests many companies are thinking more about how to sustain their pension plans than about how to shut them down, though the pension “scare” at the beginning of the decade has given corporate CFOs cause to rethink how to analyze their risk related to pension plans and how they plan to manage it in the future.
Approximately 29% of survey respondents said their pension risks are closely coordinated with a broader risk management framework, and nearly a third said they were somewhat coordinated with an enterprise risk management (ERM) framework. However, 27% said such risks were not at all coordinated with other risks.
Still, fully half (52%) of survey respondents said CFOs and senior finance teams are paying more attention to the impact of pension offerings on the company’s business performance, compared with three years ago (62% of European respondents say their CFOs and finance teams have paid more attention to pension risk in the last three years, versus 48% of U.S. respondents (1) ). Remarkably, 5% said pensions were less of a concern to senior finance professionals than they were three years earlier.
Financial issues clearly are not the only concern for finance executives, though. More than half (57%) of survey respondents “agree” or “strongly agree” that the pension plan is necessary to retain the workforce, and 39% were equally convinced that the pension plan is necessary to motivate employees.
(1) The study’s authors say that a greater attention to pension risk among European finance teams may explain the differences in portfolio allocation between European and North American respondents. European respondents report pension portfolios with assets allocated, in aggregate, 39% to equities, 39% to bonds, and 22% to alternative investments – while among US respondents, the allocations were 56% to equities, 36% to bonds, and 8% to alternatives.
On the other hand, just 19% of survey respondents said employees understand and appreciate the risk and cost the company bears to carry the pension plan. Finance executives surveyed said employees are focused on how changes in pension plans affect them, but have little focus or concern around how the pension obligation affects the company.
Across all survey respondents, roughly a third (35%) said their companies had articulated an explicit pension risk management strategy, although nearly a quarter (23%) had not. Among the largest companies (those with annual revenue in excess of $5 billion), the spread is bigger-half said their companies had articulated an explicit pension risk strategy while only 14% had not done so.
Short of mapping out a full strategy, survey respondents said their companies formally had:
- 45% - conducted an asset-liability study
- 40% - conducted detailed demographic and historical analyses to get a handle on pension risks
- 37% - performed pension financial projections under different macroeconomic scenarios
However, the researchers noted that a fair number of respondents said their companies had taken only informal action or no such action at all to analyze their pension risk.
Only 6% of respondents said pensions pose a substantial risk to the organization, and not a single respondent said the risk is acute, according to the report. Roughly one-in-five (21%) said economic risks like market performance or currencies are of substantial concern, and an equal number said operating risks like business processes or technology are of substantial concern.
Eleven percent said other benefits like health-care costs in the U.S. are of greater concern than pension plans. In fact, 12% of survey respondents said pensions pose no risk whatsoever, and more than half (54%) said the risk from pensions is minimal.
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