Sponsors of the largest U.S. defined benefit pension plans are deepening their risk-management focus on plan liabilities and are increasingly viewing plan assets in the context of liabilities, according to a new study from MetLife released Wednesday. Amid ongoing economic and regulatory uncertainty, the top two risk factors identified as most important to plan sponsors today continue to be liability-related: underfunding of liabilities and asset and liability mismatch. These two risks are followed in the importance rankings by asset allocation and meeting return goals, two investment-oriented risks.
The study, which surveyed 156 corporate plan sponsors, measures plan sponsors’ aptitude for managing — and attitudes about — 18 investment, liability and business risks to which their plans are exposed.
“A weakened economy and persistently low interest rates have combined to exert consistent pressure on DB plans,” says Robin Lenna, executive vice president of corporate benefit funding at MetLife. “In order to ensure they can meet their future obligations, plan sponsors are taking a more balanced approach to pension plan management that takes into account a plan’s assets relative to its liabilities.”
The 2012 index value is 85 out of 100, its highest level to date, up from 81 in 2011. Data from the survey is used to calibrate the importance that the companies surveyed ascribe to managing each of the 18 risk factors, their reported success at implementing comprehensive practices to manage each risk and the consistency between the two. Ideally, there should be consistency over time between the level of importance that plan sponsors ascribe to certain risks and how successfully they believe they are managing them. The increase in the index value indicates the sustained level of engagement plan sponsors have with risk management, and that plan sponsors are developing some commitment to a new course of risk management.
“There is a heightened interest among plan sponsors and senior finance executives in gaining a better understanding of the pension plan environment and its relationship to the overall financial performance of their business,” says Cynthia Mallett, vice president of corporate benefit funding at MetLife. “What has become clear over the past several years is that managing pension liabilities can be a difficult challenge for even the most sophisticated financial executive. Because plan sponsors can’t rely on traditional asset allocation models to ensure they can meet their liabilities, what is emerging are more integrated pension risk management frameworks that are carefully devised and frequently reviewed.”
In 2012, the self-reported successful management of pension risks is at its highest level in the four year history of the U.S. PRBI Study. Among the 18 risk factors presented to plan sponsors, 83% of all ratings indicated success (plan sponsors rated them a 4 or a 5, with 5 equaling highest success), compared to 75% in 2009, the first year the study was conducted. Liability measurement retained its position as the most successfully managed risk for the third year in a row, indicating that plan sponsors feel comfortable with their liability valuations and understand the drivers that contribute to their plan’s liabilities.
Despite high success ratings overall, some risks continue to present challenges for plan sponsors. Underfunding of liabilities and asset and liability mismatch, the top two risks by importance, are ranked 11th and 12th in reported success, respectively, consistent with the 2011 results.
“We believe that the economic and regulatory environment will sustain a more prudent and integrated approach to funding strategies, investment policy decisions and de-risking activity among plan sponsors.” Mallett says.
