Pension Risk Management

2015 CFO Pension Risk Survey

Taking the Next Step in Pension Risk Management : Planning to Move Ahead  

Mercer is proud to present our bi-annual survey of senior finance executives with CFO Research. In the two years since our 2013 survey we have seen a commitment on the part of plan sponsors to manage risk and mitigate funded status volatility. Many of the trends to reduce pension risk identified in our last survey have continued or accelerated. Lump-sum cashout and buyout activity has been evident since 2013 as more sponsors look to reduce their pension obligations.

Research Sponsor’s Perspective

Mercer’s summary of highlights from the recent study conducted by CFO Research and sponsored by Mercer.

During 2013, most plan sponsors saw funded status improve considerably with rising interest rates and strong equity returns. Yet in 2014, this trend reversed, and the aggregate funded status for the S&P 1500 fell from 88% to 79% through the calendar year. However, sponsors who took risk management steps to lock in the funded status gains from 2013 fared much better than those who did not.

In late 2014, reported pension plan funded status took another step back as the Society of Actuaries (SOA) updated its mortality assumptions to reflect increasing longevity. Many sponsors’ plan liabilities increased by 5%–10% due to these new assumptions, but others were able to mitigate this increase by assessing how the characteristics of their population (for example, industry) might affect expected mortality:

  • Our survey shows a high percentage of sponsors (37%) chose to adopt the new SOA mortality assumptions.
  • A significant number (31%) adopted alternative assumptions more appropriate for their plan. 
  • The new mortality tables affected broader pension risk management policy—they were the strongest influencing factor for sponsors considering modifications to pension funding policies and practices in the next two years.

Finance executives at large U.S. companies with DB plans have been sorting through the options available to them to control the impact of pensions on their balance sheets.

Risk Reduction

Over several years, we have witnessed the evolution of dynamic de-risking—from breakthrough concept to widespread strategy for pension risk management. We continue to see interest in dynamic de-risking strategies that systematically reduce risk as funded status improves, and sponsors that had taken steps to de-risk their pension plans prior to 2014 have reaped significant rewards: 

  • In 2015, over 80% of sponsors report that they either have implemented a dynamic de-risking strategy, or are currently considering one for their plan. 
  • Those that have already implemented dynamic de-risking are almost universally satisfied with the outcome (88%).

After years of sponsors looking to minimize cash contributions at every turn, this year’s survey reports a majority of sponsors are increasing discretionary contributions: 

  • Seven in ten (70%) indicate they are funding more than the minimum required. 
  • Many sponsors are taking advantage of low interest rates and borrowing to fund the plan— improving funded status and reducing PBGC premiums. Normalized survey results show that more than 30% have implemented or plan to implement such a strategy, and an additional 12% are actively evaluating one.

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