Survey: Most Companies Not Doing Enough to Insulate Pension Plans
A survey recently released by Hewitt Associates, a global human resources consulting and outsourcing company, revealed that most companies around the world need to do more to effectively manage their pension plans in times of weak economic conditions and through poor market returns. In fact, most have taken only small and conservative steps to manage their risk at a time when careful monitoring and measurement, and strong, meaningful actions should be the order of the day. However, Hewitt's survey also found there are steps employers can take now that will enable them to ensure the long-term health and stability of their pension plans, as well as protect them from volatile market and economic conditions.
Since the start of the credit crunch in the last quarter of 2007, pension plan assets on a global level have plummeted by $4 trillion--three times greater than the amount of money provided in government bail-outs to global financial institutions. Against this background, Hewitt conducted a survey of 171 plan sponsors in 12 countries to determine their attitudes and actions around managing pension risk. In the United States, Hewitt's survey revealed that many companies have been relatively early movers in making plan design changes to their defined benefit programs. However, they have yet to employ the full range of actions at their disposal to manage pension risk, such as more sophisticated investment solutions, integrated funding and investment strategies, and liability management techniques.
"While some U.S. companies did take early action to manage pension risk leading up to the current economic situation, a majority of plan sponsors remain exposed to events like those we are experiencing," said Joe McDonald, head of Hewitt's Global Risk Services practice in North America. "Recent market performance has put plan sponsors back in the position of trying to manage their under-funded pension plans--a position they struggled with for the better part of this decade. Now is the time for plan sponsors to review their risk management strategies to ensure they make sense in today's markets, given current funded levels and the ever-changing regulatory framework in which we operate."
Hewitt's survey identified a significant, determined, and growing minority of U.S. companies that have adopted leading-edged practices that have better positioned themselves to weather volatile economic environments and market conditions. These players can be characterized by their attitudes to all aspects of understanding and addressing their pension risks, Hewitt says, adding that appropriately managing the trade-off between risk and reward starts with proper risk identification. Leading plan sponsors realize that in order to adequately determine risk exposure and set long-term risk objectives, it is critical to implement clearly defined and consistent metrics that evaluate the interaction of pension assets and liabilities, rather than just evaluating one side of the risk equation.
Companies best aligned to manage the continued economic turmoil routinely reassess risk in order to make appropriate decisions based on the best information possible, Hewitt says. While 82 percent of U.S. companies in the survey reviewed asset return levels quarterly or more frequently, only 14 percent measured funded status more than quarterly--illustrating the clear disconnect between the asset and liability sides of the risk equation. When it comes to risk measures, the picture is even bleaker, with only 72 percent of companies reviewing risk metrics on an annual or less frequent basis. This level of infrequency makes it more difficult for companies to capitalize on opportunities that present themselves from both a risk and return perspective, Hewitt concluded. For more information, visit www.hewittassociates.com.