Hewitt Survey Shows U.S. Employers Implementing Aggressive Strategies to Manage and Reduce Pension Plan Risk
December 10 2009 - 8:00AM
Business Wire
In response to soaring liabilities and record-low funding
levels, a new survey by Hewitt Associates, a global human resources
consulting and outsourcing company, finds that most U.S. companies
are taking active steps to reduce their overall pension risk by
changing the way they fund, invest and design their pension plans.
Most notably, the U.S. findings of Hewitt’s annual Global Pension
Risk survey revealed:
- A majority of the 153 large U.S.
employers surveyed have adopted funding policies designed to
maintain an 80 percent funded level.
- There is growing interest among
U.S. companies to implement dynamic asset allocation strategies,
which ‘de-risk’ their pension plans as their plan’s funded ratio
improves.
- The number of U.S. companies
considering closing and/or freezing their plans in the future has
almost tripled compared to 18 months ago.
- U.S. companies are five times
more likely than last year to consider delegating their entire
investment policy to professional advisors.
These findings are a notable shift in action from last year’s
survey, where U.S. employers recognized the importance of managing
pension risk but took only small and conservative steps to protect
themselves from volatile economic conditions.
“Risk related to pension plans is having a significant impact on
company performance and has become a board-level agenda item for
many U.S. companies. Still, many plan sponsors felt unprepared for
the most recent wave of funded status volatility and couldn’t
respond in a timely and productive manner,” said Ari Jacobs,
Hewitt’s North American Retirement Solutions Leader. “Successfully
managing pension risk requires a balanced and integrated approach
that incorporates all aspects of plan management—from investment
and funding policies to benefit plan designs. This year, we’ve seen
a significant shift toward this approach as companies seek to
mitigate costs and ensure the long-term health and stability of
these benefits.”
Increasing Contributions to Meet Funding Requirements
Hewitt’s survey also shows that most U.S. companies (83 percent)
expect to make additional contributions to their pension plans.
Among these companies, 11 percent indicate that the additional
contributions will have a significant impact on their business and
more than half (51 percent) say the impact will be material but
manageable. Interestingly, two-thirds of companies (66 percent)
expect to fund their pension plans to at least 80 percent to meet
the new threshold requirements under the Pension Protection Act
(PPA) of 2006 and avoid triggering benefit limitations. This
suggests that most U.S. plan sponsors with pension plans funded
below 80 percent are operating under more severe funding
requirements than the minimum requirements under PPA.
Aligning Pension Assets and Liabilities
In response to the recent market turbulence, Hewitt’s survey
shows U.S. employers have already taken a number of steps to manage
risks within their investment policies, with almost 40 percent
reducing their equity exposure. In addition, many organizations are
increasing their fixed income allocation with assets that better
match liabilities, such as corporate bonds (37 percent) and/or
treasury bonds (19 percent).
There is also a growing number of U.S. companies (15 percent)
implementing dynamic investment policies, a new framework that
defines an asset rebalancing strategy that changes as the plan's
funded ratio improves.
“While still an emerging trend, more companies are looking at a
rules-based approach to de-risking their pension plans,” said Joe
McDonald, Hewitt's North American Risk Services Leader. “Dynamic
investment policies integrate a plan's asset allocation decision
with its funded ratio, so companies can better protect their
balance sheets from volatile swings in the funded position of their
pension plans.”
Considering Reductions of Future Benefits
According to Hewitt’s survey, U.S. companies are thinking more
seriously about reducing their future commitments as cost
obligations and associated risks become harder to bear. Thirty-one
percent of U.S. companies are more likely to consider closing their
plans today than they were 18 months ago, compared to 11 percent of
companies in 2008. A similar trend exists for plan freezes, with 50
percent of companies now more likely to consider freezing their
plans to existing participants, up from just 17 percent in
2008.
Adopting New and Innovative Plan Management
Approaches
As a result of the more complex regulatory and economic
environment, U.S. employers are showing a continued and growing
interest in using professional advisors to help them make
investment decisions. According to Hewitt’s survey, more than half
(51 percent) of companies have outsourced the performance
monitoring of their investments or are more likely to do so
compared to 18 months ago. Forty-one percent said they have
outsourced liability-hedging strategies or are more likely to do
compared to 18 months ago. Further, companies are five times more
likely than last year to consider delegating their entire
investment policy to professional advisors, from 4 percent in 2008
to 20 percent in 2009.
“Many U.S. companies simply don’t have the knowledge or time to
develop a strategy for maximizing asset returns, controlling
volatility and decreasing risk in their pension plans,” said
Jacobs.
“Delegating these responsibilities to an outside provider has
become an increasingly attractive option because it can reduce a
company’s pension plan costs and enable organizations to devote
more resources toward other corporate finance risks and
business-critical activities,” he adds.
Incorporating Pension Risk Monitoring and Measurement
In the past year, U.S. companies have recognized the need to
take a more active role in monitoring the risk associated with
their pension plans. Compared to 18 months ago, Hewitt’s survey
shows that more than three quarters (78 percent) have either
started to monitor the financial risk in their pension plans or
have increased how often they measure it.
However, most companies still focus on asset-only benchmarks to
measure how successfully they are managing their plan assets.
Pension plan liabilities generally receive far less attention and
they are rarely reviewed as frequently or consistently as
asset-only benchmarks. Hewitt’s survey found that just 12 percent
of companies use the growth in their liabilities as the primary way
they measure success of their plan’s assets.
“While there is a significant increase in the number of U.S.
companies monitoring risk, many organizations are still in danger
of making suboptimal decisions if they focus only on the asset side
of the equation,” notes McDonald. “Companies need to give equal
attention to both asset and liability results, as it is the funded
position—or assets less liabilities—that is recorded on company
balance sheets and directly influences cash contribution
requirements and income statement charges. By focusing on funded
status, companies gain a clearer understanding of the risks
associated with both sides of the pension balance sheet and how
they interact. This enables them to make decisions that optimize
risk and return from a PPA and mark-to-market perspective.”
About Hewitt Associates
Hewitt Associates (NYSE: HEW) provides leading organizations
around the world with expert human resources consulting and
outsourcing solutions to help them anticipate and solve their most
complex benefits, talent, and related financial challenges. Hewitt
works with companies to design, implement, communicate, and
administer a wide range of human resources, retirement, investment
management, health care, compensation, and talent management
strategies. With a history of exceptional client service since
1940, Hewitt has offices in more than 30 countries and employs
approximately 23,000 associates who are helping make the world a
better place to work. For more information, please visit
www.hewitt.com.
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