HEW Hewitt Associates

A new survey released today 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 U.S., 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, including: Embedding risk within an overall risk framework. Appropriately managing the trade-off between risk and reward starts with proper risk identification. Not surprisingly, the majority of respondents worldwide identified financial risk as the most important (73 percent). In the U.S., financial risk and regulatory risk ranked highest in importance�most likely due to recent pension legislation, including the Pension Protection Act (PPA) of 2006. More alarming is that governance (12 percent) and strategic risk (4 percent) received such low marks. Additionally, successful companies view and manage pension risk within the broader framework of the company�s overall risk profile and strategy. Currently, less than one-quarter (24 percent) of companies view risk in this way. Measuring risk against clear and consistent metrics. 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. Only 18 percent of U.S. plan sponsors report benchmarking plan asset performance relative to a liability-based benchmark, while asset-only benchmarks such as market indices (80 percent), peer group comparisons (60 percent) and expected return hurdle rates (54 percent) all received higher marks. Using a liability-driven benchmark allows sponsors to look at the impact on the plan�s funded status rather than�assets in isolation, enabling them to make better decisions in seeking risk-adjusted returns for their plans. �How plan sponsors define and measure performance will ultimately translate into how they make decisions. As a result, performance metrics need to be clear and consistent with the plan sponsor�s objectives. This typically leads to liability-based metrics for both risk and return,� noted McDonald. Balance short-term volatility with long-term goals. When asked about factors that influence their attitude toward pension risk, a majority of U.S. companies (82 percent) cited income statement and cash volatility as the primary driver, while only 16 percent are focusing on the long-term rewards of risk-taking as the primary influence on their attitude toward risk. This increasing focus on short-term results creates new problems that are best solved with new solutions such as derivative-based investments and liability settlement options (e.g., lump-sum payments). �Many companies see risk as being a short-term issue and often a short-term accounting problem,� said Paul Garner, principal in Hewitt�s International Benefits Consulting practice. �The relative scarcity of capital in the current credit crisis, combined with down markets and the requirements of the PPA, will undoubtedly increase the prominence of cash contributions. Successful plan sponsors will be those that achieve balance between short-term fluctuations and long-term goals.� Taking action to respond to risk. In the turbulence of the current financial markets, companies must take decisive actions to manage risk. While U.S. companies have been relatively early movers in making plan design changes�66 percent have closed their defined benefit plans to new entrants and 24 percent have already stopped accruals�many plan sponsors find that benefit changes do little to the risk profile of their pension plans while having a significant impact on employees. Successful plan sponsors are focused on their pension investment and funding strategies. In the U.S., half are considering reducing the asset-liability mismatch in their plans, while 60 percent intend to establish or revise their funding policy. In addition, successful plan sponsors are transitioning management activities to those with the resources and expertise to excel. Many are either considering or have already outsourced much of retirement plan management, such as asset manager monitoring (54 percent), asset manager selection (40 percent), Liability Driven Investing (LDI) (20 percent) or other liability matching techniques (38 percent), and tactical asset allocation changes (32 percent). This trend will likely continue as the task of managing retirement programs becomes increasingly complex. Continuous monitoring. Companies best aligned to manage the continued economic turmoil routinely reassess risk in order to make appropriate decisions based on the best information possible. While 82 percent of U.S. companies in Hewitt�s 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. �Clearly these are challenging times for plan sponsors, and all stakeholders,� said McDonald. �The good news is that there are steps that can be taken now to manage pension risk so that companies are better positioned to navigate today�s choppy waters and to weather future storms. Hopefully, recent events have made plan sponsors stand up, take notice and seriously consider implementing these emerging best practices.� About Hewitt Associates For more than 65 years, Hewitt Associates (NYSE: HEW) has provided clients with best-in-class human resources consulting and outsourcing services. Hewitt consults with more than 3,000 large and mid-size companies around the globe to develop and implement HR business strategies covering retirement, financial and health management; compensation and total rewards; and performance, talent and change management. As a market leader in benefits administration, Hewitt delivers health care and retirement programs to millions of participants and retirees, on behalf of more than 300 organizations worldwide. In addition, more than 30 clients rely on Hewitt to provide a broader range of human resources business process outsourcing services to nearly a million client employees. Located in 33 countries, Hewitt employs approximately 23,000 associates. For more information, please visit www.hewitt.com.