Each year the ERISA Advisory Council, which held hearings last week, takes up three issues it determines should be addressed by the Department of Labor. One of the issues discussed at the most recent hearing (and elsewhere on Employee Benefits Adviser) is the de-risking or risk transfer of defined benefit (DB) pension plans.
The government’s desire to address this issue is supported by the data coming from industry sources. A recent MetLife Pension Risk Behavior Index (PRBI) showed that in 2013, the PRBI value was recorded at 87 – its highest value since the study was introduced in 2009.
“The five years that we have been doing this study has effectively chronicled the significant structural fundamental change in how pension risk management is really being viewed by plan sponsors,” says Cynthia Mallett, Vice President, Industry Strategies and Public Policy, Corporate Benefit Funding with MetLife.
Even in 2009, she notes, the attention being paid by DB plans was rooted in modern portfolio theory, something that had prevailed for the past 20 years, and looked at asset allocation and how best to manage the sub-managers of the plan. And in a short five years the shift in thinking has changed dramatically, notes Mallett.
“It’s quite striking. The index value movement goes along with that. What we’ve really seen, chronicled over the last five years in these study snapshots, is the move of the whole collective plan sponsor community from one firmly entrenched way of thinking about this particular set of issues to a 180 degree change to what pension plan management means today. It’s not about investment style and asset allocation, it’s all about asset liability mismatch,” she explains.
In fact, one of the study’s findings shows that 38% of plan sponsors report they have already taken or are planning to take action to de-risk their plans (either through a partial risk transfer, pension buyout or some other risk mitigation strategy).
While tools are lagging for plan sponsors to measure how effective asset management is matching assets to liabilities, they are emerging, she notes. “The one part of the process that plans sponsors have totally nailed is getting a handle on what their liabilities are.”
Mallett stresses the changes in plan sponsors’ thinking are “long-term and permanent,” even as certain issues like the potential normalization of interest rates become part of the debate. She says the U.S. is a full two-years into a bull market, but as long as rates are low and liabilities remain overstated, it’s difficult to undo the newer and more different way of looking at pension plan management.
Adds Mallett, “Moving forward, we expect that this balanced and integrated approach will continue to provide a sustainable basis for the decisions made and actions taken.”
Joel Kranc is Director of Kranc Communications, focusing on business communications, content delivery and marketing strategies. He has written and worked in the retirement and institutional investment space for 17 years covering North American markets, large institutional pensions and the adviser community.
