(January 10, 2011) — Risk assessment and management are the main focus points for corporate boardrooms evaluating and resolving pension schemes, according to a survey by Mercer.
The survey found that 65% of chief financial officers in the United States were concerned about the impact of the current and future global market uncertainty and volatility.
“Pension deficits and the impact upon the financial health of their organizations are a key concern in many boardrooms and C-suites, and the time to act is now. With such market volatility, plan sponsors need to be nimble to take advantage and put in place a robust risk management plan,” said Jonathan Barry, Partner in Mercer’s Retirement, Risk and Finance business, in a statement.
Mercer has identified the five most important pension risk management steps for US pension plan sponsors, which consist of the following:
1) Review the plan’s funded status as part of your regular plan reporting. “Frequent funded status monitoring is the foundation for understanding the overall health of your plan,” said Richard McEvoy, Mercer Dynamic De-risking Solutions US Leader.
2) Understand the range of possible outcomes to which your pension plan exposes your organization.
3) Develop a formal de-risking plan. According to Mercer, sponsors should develop a roadmap to de-risk the plan that can be executed quickly as and when opportunities arise. See aiCIO’s Liability-Driven Investing Issue here.
4) Explore liability transfer strategies.
5) Review your governance structure and decision-making process. “It is important to focus both on strategy and execution and to ensure that internal obstacles do not get in the way when the time is right,” said Nick Davies of Mercer’s Investments business.
A November study by consulting firm Hymans Robertson predicted a record year for de-risking among UK schemes with deals potentially topping £9 billion. The consulting firm also found that more than £2 billion of pension fund liabilities was transferred in the third quarter of the year through buy-ins, buyouts — in which companies transfer their closed pension plans to insurance firms — and longevity swaps. Looking ahead, the firm noted that a large number of risk transfer deals are likely to close in the fourth quarter, making 2011 a record year for de-risking among UK pension plans with deals likely topping £9 billion. Meanwhile, Hymans Robertson found that longevity swaps have removed £9 billion of scheme liabilities since they took off in 2009. The £1.1 billion Turner & Newall buy-in with Legal & General, announced at the end of October, was the largest of its kind to date.
“A series of significant pension scheme risk transfer deals expected to close during the fourth quarter of 2011 look set to ensure that 2011 will be a record year for pension scheme buy-ins, buy-outs and longevity swaps; with deals potentially topping £9 billion of UK pension scheme liabilities during 2011 alone,” commented James Mullins, Partner and Head of Buy-out Solutions at Hymans Robertson, in a statement. “Pension schemes are increasingly viewing buy-in deals simply as an investment strategy decision, and one that looks particularly attractive in the current market. Many pension schemes are reviewing their Government gilt holdings, which provide quite a good match for pensioner liabilities, given the option to exchange some of their Government gilts for a buy-in policy, which provides a near perfect match for pensioner liabilities, and at a potentially lower cost. This pricing dynamic is one of the few positives for UK pension schemes following the market turmoil since the summer of 2011.”
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