Long gone are the days when defined benefit pension plans could be put on "auto-pilot," requiring nothing more than an annual check to ensure that contributions were sufficient over the long-haul. To help sponsors deal with the changes that have taken place and to be prepared for the future, Mercer has developed a new and innovative framework for budgeting, monitoring and managing pension plan risk.

The framework, Integrated Retirement Financial Management (iRFM), allows plan sponsors to measure pension plan financial risk and return and interpret them against key performance indicators (KPIs). The financial risk and associated return can then be managed or mitigated using three integrated policy levers, to find and maintain an optimal balance. 

Plan design will change the risk and cost associated with future benefit accruals, and can even influence the risk and cost of legacy (i.e. accrued) benefits. Its influence on overall risk and cost may be gradual. Certain types of plan designs (i.e., cash balance plans, plans paying lump sums, plans with defined contribution offsets) can pose special risk management challenges.

Contribution policy must be integrated with the investment policy to fully assess risk and cost since both influence the funded position of the plan, the risk of variability in contributions and of unexpected contributions, as well as the accumulation of potentially unproductive surplus.

Investment policy has a significant impact on risk exposure for both legacy and future benefits. A reduction in risk does not necessarily mean a reduction in expected return and an increase in expected long term cost. The positioning of the current portfolio, the potential for alpha enhancement, and the possibility for unproductive surplus all play a significant role in determining the risk/reward balance from investment policy. Both return and cost should be measured on a fundamental economic basis to fully assess this.

The iRFM strategy process is founded on Mercer’s deep knowledge of the implementation challenges of investment strategy, especially those tied to risk-management goals. In our view, it is impossible to create an effective strategy without a thorough knowledge of implementation processes and value delivery. This is why Mercer has created the Financial Strategy Group, which combines asset and liability expertise in planning, implementing and ongoing monitoring. This unique collection of knowledge and practical experience enables us to provide our clients with pension financial strategy solutions that are designed to meet their goals in the most practical way.