Despite weak economic conditions and poor market returns, most companies have taken only small steps to guard against defined benefit (DB) pension risk, particularly Canadian plans, according to a Hewitt Associates survey.
Toronto (7 January 2009) – A new survey released by Hewitt Associates, a global human resources consulting company, reveals that many companies around the world have not taken adequate measures to guard against defined benefit (DB) pension risk.
Even in the face of weak economic conditions and poor market returns, most companies have taken only small and conservative steps to risk management. The issue is particularly pressing in Canada, which survey results indicate has the highest proportion of DB plans open to new entrants, as compared to companies from other countries responding to the survey.
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 (US). Against this background, Hewitt conducted a survey of 171 plan sponsors in 12 countries in summer 2008 to determine their approaches and attitudes to managing pension risk.
"The current financial environment underscores the need for organizations to manage retirement risk in the same way they handle general business risk-by determining their risk tolerance and being vigilant," said Rob Vandersanden, a senior pension consultant in Hewitt's Calgary office. "We're not advocating that companies eliminate risk entirely – that would minimize investment returns – but we do recommend that they understand the risk they've assumed and ensure it is appropriate for the return it is likely to generate."
In terms of the factors that influence a company's attitude towards managing pension risk, accounting issues dominate globally, principally in terms of the impact on the profit and loss statement. Canadian organizations, due to differences in accounting standards between Canada and the rest of the world and our solvency funding regime, are more concerned with cash funding requirements.
The impact on a plan sponsor's financial resources is so significant that organizations, particularly in Canada, are moving pensions out of the realm of human resources and under the management of their finance teams.
Strategy versus Knee-Jerk Reaction
Survey respondents were asked about the measures they use to quantify their risk exposure and how frequently they measure risk. Surprisingly, one third of Canadian participants say they have no formal quantified measure of their pension risk.
The most typical risk monitoring pattern for Canadian organizations is a quarterly update on asset values (45 percent of respondents), but an annual update of liability values, and risk measures (45 percent of Canadian respondents) is also common. However, the frequency of risk monitoring may have increased in recent months with higher market volatility.
Canadian DB Plan Sponsors Not Prepared
It is still early days for pension risk management in Canada-although plan sponsors in this country recognize the opportunity to learn from experiences in the U.K. Nearly 40 per cent of Canadian plans have no policy for dealing with their interest rate and inflation exposures, despite the fact that they rate interest rate risk as the biggest component of their overall risk budget. Consequently, Canadian plan sponsors do not appear to be fully prepared to act quickly when market conditions present themselves that could allow them to reduce risk.
A more disciplined approach to pension risk management not only helps to minimize the impact on the company's bottom line, it means employees can rest easy that liabilities are not going to sink the pension plan and their retirement income is safe.