No. 1 Worry for Pensions for Second Straight Year: Underfunded Liabilities

Once again, underfunded liabilities is the most important risk factor facing US corporate defined benefit plans, according to the 2012 MetLife US Pension Risk Behavior Index survey.

(March 1, 2012) — The premier risk factor facing corporate defined benefit plans in the United States, according to a recent MetLife study: unfunded liabilities.

The survey of 156 US defined benefit plan executives was conducted with Bdellium and Greenwich Associates from September through December.

MetLife’s 2012 US Pension Risk Behavior Index survey showed that underfunding of liabilities was selected as the most important of 18 different pension fund risk factors 66% of the time — a number that remained unchanged from 2011.

The study said: “With the heyday of overfunded pension plans a distant memory today, plan sponsors’ governance committees and their colleagues…are struggling to maintain adequate funding to meet their plans’ obligations. They are focused on reducing the unpredictability of the plan in order to ease the financial strain that many plans have placed on corporate balance sheets and income statements…They are also searching for a strategy that will enable these plans to operate with an acceptable level of volatility.”

The top four risk factors remained unchanged from MetLife’s prior survey. While asset and liability mismatch was selected as the most important risk factor 65% of the time (up from 60% last year), the next two risk factors were also in line with last year’s results. Meanwhile, asset allocation was cited as the most important 46% of the time is was presented, while meeting return goals was selected as important 43% of the time.

Corporate pension plan executives have reason to be worried about their liabilities. This week, an analysis by Russell Investments showed liabilities have outpaced the growth in assets for the publicly listed corporations in the United States with pension liabilities over $20 billion. According to the firm, the “$20 billion club” — a group that represents nearly 40% of the pension assets and liabilities of all US-listed corporations — now has a combined shortfall of worldwide pension assets below liabilities of $173 billion on their balance sheets, up from $121 billion last year. In other words, the analysis showed that pension liabilities grew faster than assets in 2011, and cash contributions have continued to rise.

“When combined, the $20 billion club represents more than three quarters of a trillion dollars in pension liabilities, so it is a good guide to what is happening in the system as a whole. Even though corporations are taking steps to close their pension deficits, falling interest rates in 2011 meant that just about everyone’s position deteriorated,” said Bob Collie, chief research strategist at Russell Investments, in a statement.

The solution to rising shortfalls for pensions worldwide, according to Russell: De-risking, diversifying, and focusing on total portfolio outcomes via multi-asset portfolios.

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