With little certainty in the current market environment, CFOs and those that run pensions are interested in reducing exposure to pensions financial risk.
In a new Mercer report (in conjunction with CFO Research) entitled Evolving Pension Risk Strategies, 49% of financial officers say they are currently matching the duration of fixed-income investments to defined benefit plan liabilities. Forty-three percent are shifting assets into lower-risk categories as a company’s funded ratio improves – something known as “dynamic de-risking.”
“Overall, we see plan sponsors moving toward ‘outcome-based’ objectives, with a clear road map for getting from their current state to a desired level of risk over the next several years,” says Jonathan Barry, Mercer’s US Retirement DB Risk Leader. “They are adopting a more holistic approach to risk management which integrates plan design, risk transfer and investment management strategies.”
According to the report, many sponsors looked at de-risking and liability matching in the past two years, but even more will be addressing these issues in the next two years. For example, 32% say they are very likely and 41% say they are somewhat likely to match the duration of fixed income investments to DB plan liabilities.
Of the factors sited that would likely prompt companies to change their pension risk-management policies within the next two years, advice from external consultants (52% somewhat likely) and increasing longevity assumptions (47% somewhat likely) were rated high.
Until 2012, many companies remained either reluctant or unable to transfer portions of their DB portfolios to third parties, such as insurance companies, in the form of annuities or lump-sum payouts. However, changes in legislation combined with the high-profile risk transfer actions taken by General Motors and Verizon in 2012 have opened the eyes of sponsors to consider other options as they manage the overall risk of their plans.
Sixty-nine percent of the respondents to the survey say that they are somewhat or very likely to offer lump-sum distributions to current employees at some point in the future, while 67% say they are somewhat or very likely to offer lump sums to former employees who are yet to retire.
Nearly half of respondents (48%) said their companies were very likely or somewhat likely to purchase annuities or transfer liabilities to a third party in the next two years. A similar number (45%) of respondents said the pension risk transfer transactions of such large companies as GM and Verizon had made this option seem more viable.
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.
