Senior Finance Executive Survey: Pension Risk Dema

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Senior Finance Executive Survey: Pension Risk Demands Decisive Action

  • 25-June-2013
  • United States, New York

Plan sponsors’ executives are taking decisive action to reduce exposure to pension financial risk, according to a survey of 177 financial officers conducted by CFO Research in conjunction with Mercer.

Many large companies are reorienting their DB plans to outcome-based strategies ensuring steady, if not spectacular progress in improving their funded status and better protecting their plans from the uncertainty of market swings.

About half the companies represented in the survey (49%) are currently matching the duration of fixed-income investments to DB plan liabilities and 43% are employing dynamic de-risking which shifts assets into lower-risk categories as the company’s funded ratio improves.

“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,” said 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.

“As funded ratios improve, additional de-risking becomes both more attractive and more feasible,” Mr. Barry noted. “At the end of May, 2013, pension funding levels for the S&P 1500 stood at 86%, the highest level in nearly two years. This compares to an estimated 74% at December 31, 2012, and the record low of 70% at the end of July, 20121. This improvement dovetails nicely with feedback we are getting from clients who have implemented a glide path strategy. They are reaping the rewards of this rapid improvement.”

“This also highlights the benefit of having a nimble execution process in place ahead of time to capitalize on market changes as they arise,” said Richard McEvoy, a Partner in Mercer’s Investment business.  “Mercer has executed over 100 dynamic de-risking triggers on behalf of clients since the financial crisis, with a significant uptick in activity as funding levels have improved.”

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 cashouts. However, favorable changes in legislation combined with the high-profile risk transfer actions taken by General Motors and Verizon in 2012 have expanded the array of options for sponsors to consider as they manage the overall risk of their plans.

Some 69% of the respondents to the CFO Research survey said that they are somewhat or very likely to offer lump-sum distributions to current employees at some point in the future, while 67% said 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.

A significant number of survey respondents (37%) cited  current low interest rates as a current disincentive, with only 14% of respondents anticipating meaningful increases in interest rates over the next 12 months.

The Mercer US Pension Buyout Index2 features monthly average pricing information from independent third-party insurers. It allows plan sponsors to see how the approximate current cost of the purchase of annuities changes over time and to evaluate the cost of a buyout against the administrative costs, PBGC premiums and risks of holding pension fund liabilities for retirees. When these factors are taken into account, Mercer believes annuitization may be attractive. Indeed, in some situations, the cost to buyout these liabilities through annuities may actually be lower than the accounting liability plus administrative and management expenses. The reward may be a significant reduction in balance sheet risk.

1The May 31, 2013 funding release may be accessed at http://www.mercer.com/press-releases/1531360.

2The Mercer US Pension Buyout Index may be accessed at www.mercer.com/US-pension-buyout-index

Notes on Survey Methodology

In March 2013, CFO Research, in conjunction with Mercer LLC, surveyed senior finance executives at U.S. companies to examine the progress companies have made in managing their defined benefit (DB) plans and their outlooks for their paths forward. This research follows on a similar study sponsored by Mercer in 2011. For this year’s study, the firm collected 177 qualified responses to the survey, from finance executives employed at companies and nonprofit organizations with annual revenue of $500 million or more and defined benefit plans with $100 million or more in assets. CFO Research also conducted an interview program with 10 senior finance executives at large North American com­panies with DB plans.

 

About Mercer

 

Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s 20,000 employees are based in more than 40 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 53,000 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @MercerInsights.

 

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