THE NEED TO MANAGE PENSION RISK

Managing pension risk has become a critical business issue since pension funded status was made an integral part of a company’s balance sheet. Sponsors are already overburdened with compliance requirements and have limited time and resources to deal with a fast-moving market environment. Many are seeking a roadmap to reduce pension risk and are beginning to wrestle with the strategic, operational and resourcing  challenges that follow. This is especially true for plan sponsors that have closed or frozen their plans and are targeting an eventual endgame that may include plan termination.

The Mercer Dynamic De-risking Solution (MDDS) is an end-to-end outsourced solution aligned to plan sponsor governance and financial needs, for sponsors that wish to de-risk their plans over time. It is designed to help
manage pension plans toward full funding while concurrently reducing risk – all in a timely, disciplined and cost-effective manner.

MDDS combines the firm’s depth of experience in the retirement actuarial and investment consulting arenas with its investment management operational platform. The goal is to provide a holistic de-risking roadmap that can be executed quickly and efficiently. We believe our offering is unique in the industry, as we have both the strategic expertise and the execution platform to deliver this integrated solution.

CAPTURING OPPORTUNITIES

Figure 1 illustrates the past 11 years of funded status for the aggregate S&P 1500 retirement programs. Within this volatile financial period, there were several periods of funded status improvement when plans could have locked in gains, thereby reducing the impact of subsequent market corrections. However, most pension funds missed these opportunities to manage risk – first at the peak of the tech bubble, once again at the peak of the housing bubble, and finally during the recent partial recovery from the liquidity crisis overhang – due to a combination of being:

• Not ready – No formal plan for de-risking when conditions improved
  

   

• Not aware – Infrequent measurement and monitoring of plan financials
  

   

• Not equipped – No tools to generate and execute timely trades
  

   

• Not fast enough – A governance structure that wouldn’t have allowed taking timely advantage of opportunities through quick execution

THE CASE FOR DYNAMIC DE-RISKING

A dynamic de-risking strategy provides plan sponsors with a framework to define their target endgame, along with a roadmap to get there. See Figure 2 for details. The roadmap enables plan sponsors to react to market conditions as they present themselves and continue on the path to their desired outcome. In particular, many sponsors of frozen plans may wish to de-risk and terminate their plans as they reach full funding. To achieve this, plan sponsors can execute a “glide path” investment strategy to capitalize on risk reduction or risk transfer opportunities as they arise.

Although many plan sponsors have developed such roadmaps in the past, the greatest plan in the world is of limited use if there is no supporting infrastructure to execute it. The best approach to execution requires the right mix of governance structure, operational capabilities and integrated expertise, so that sponsors can not only identify opportunities, but also capitalize on them immediately.

WHY OUTSOURCE DYNAMIC DE-RISKING TO MERCER?

Mercer’s strategic advice, coupled with the streamlined delivery platform of MDDS, will simplify your operational processes and some of the more-time consuming aspects of plan management, such as asset-liability monitoring and trade execution. Through our systematic approach to derisking, Mercer can:

• Save you time – You need to focus on strategic issues that have the greatest financial impact and, thus, have limited time and resources for plan management.
  

   

• Handle the detailed execution of plan strategy for you – We have spent millions of dollars developing an operational and trading platform designed specifically for your derisking needs.
  

   

• Deliver to you the benefits of asset and liability integration – Dynamic de-risking requires sophisticated knowledge of assets and liabilities and an integrated approach to risk reduction. Mercer is known for its expertise in the fields of both retirement and investment consulting and brings this depth of expertise to both sides of the balance sheet.
  

   

• Enhance your ability to respond to market  opportunities – In many cases, the traditional financial governance structure of committee meetings, reviewing past performance on a quarterly basis, does not allow plan  sponsors to identify all opportunities or to react quickly to changing plan or marketplace conditions.

Through MDDS, Mercer will:

• Identify derisking opportunities by monitoring the plan’s assets, liabilities and funded position
  

   

• Immediately execute appropriate trades based on pre-agreed funding status triggers, thereby taking the emotion out of decision making and avoiding potentially costly delays caused by the infrequency of committee meetings MDDS provides a complete framework that transforms the way plan sponsors manage the financial uncertainties of their defined benefit plans.