Risk Management Seen as More Important Than Return on Assets When Managing Pension Portfolios, According to Joint CFO Research/Towers Perrin Survey

2008-09-09 23:41:02 -

- Towers Perrin Michael McNamara, 914-745-4126 michael.mcnamara@towersperrin.com More than 75% of senior finance executives across the United States and Canada said they plan to focus on reducing risk in their defined benefit (DB) pension portfolios, rather than seek greater return on assets, according to the second CFO Research Services study conducted in conjunction with professional services firm Towers Perrin.

On the plan design front, 62% of the executives surveyed noted the primary reason for rethinking their pension strategies was the result of changes in regulation, legislation or accounting standards. Additional catalysts that have prompted changes in plan design include recent financial market events (41%) and changes in company performance (33%) -- both of which have placed tremendous pressure on finance teams and pension portfolios.

"It is quite clear that the combination of difficult investment returns, increased regulations and more stringent funding requirements are forcing senior finance executives to reconsider their pension risk strategies," said Sylvia Pozezanac, Towers Perrin principal and leader of the firm's Retirement Risk Solutions business practice. "Their caution may not come as a great surprise. We have seen a great deal of volatility in the capital markets over the last 10 months."

Executives Rethinking Pension Plan Design

When it comes to plan design, nearly half of all respondents (45%) said that performance of the economy or financial markets was the external event that contributed most materially to the decision-making process in DB plan design since 2000. Additional factors that have contributed to DB plan design changes included competitors' pension offerings (40%), changes in retirement program regulations (37%), increased investor demand for profits and financial strength (18%) and increased scrutiny of risk management practices.

This study includes a comparison of survey respondents' opinions with publicly available pension data of respondents' companies.

"In this analysis, we found that when pension plans hold significant assets (when compared to total corporate assets), represent an especially large or mature commitment to benefits, or have a substantial impact on cash flow or earnings, companies are consistently more committed to increased funding of their pension plans in the years ahead," said Sam Knox, Vice President and Director of Research, CFO Research Services. "But they appear to be more reluctant to make dramatic changes in the actual design of their DB plans in the years ahead -- or to off-load risk onto third parties. Instead, they are most likely to address the risk from pensions through asset portfolio management methods like duration matching in its various forms."

DB Pension Plan Popularity Has Waned, but Plans Unlikely to Disappear Soon

Since 2000, the majority of company executives surveyed have made incremental changes to alter their DB plan designs. Thirty-six percent of respondents said they have closed existing DB plans to new employees while continuing benefit accruals for current employees, while more than a quarter (28%) said they replaced DB plans with defined contributions plans, shifting investment decisions from the employer to the employee. In addition, while survey respondents noted there will likely be more incremental changes to come for DB plans, two-thirds (67%) of companies are not likely to terminate them outright in the next 24 months.

Among some of the other survey findings:

-- Only 21% indicated pension risk management is closely coordinated with a broader risk management framework.

-- Twenty-seven percent noted that liability-based asset management prevails as the most common risk reduction strategy.

-- Companies have managed their asset portfolio risk by altering their equity portfolios, investing in alternative assets and optimizing their fixed-income portfolios.

-- Nearly half (47%) said that regulatory or accounting requirements would be the chief obstacles impeding their ability to make timely decisions or desired changes in DB plans over the next two years.

-- Forty-eight percent indicated that recent trends in the capital markets and macroeconomic outlook have made their company seriously consider changing its asset allocation strategies, while 29% said it made their firm consider altering its DB plan design.

"There will continue to be many forces at work that affect the relationship between a company and its employees," said Ms. Pozezanac. "For many companies, pension plan management will include making simple changes to policies and portfolios, while for others, the process of evaluating the trade-offs involved with offering these plans will have broader implications for companies' financial health and their relationships with both current and former employees."

About This Study

The study, Defined Benefit Plans Amid Market Volatility, was conducted with CFO Research Services, the sponsored research unit of CFO Publishing, which produces CFO magazine. In March 2008, CFO collected the opinions of 214 senior finance executives across the United States and Canada with DB pension plans, and whose annual revenues range from $100 million to more than $20 billion. The full study is available through CFO's Web site (www.cfo-research.com), and through Towers Perrin's Web site (www.towersperrin.com).

About CFO Research Services

CFO Research Services is the sponsored research group within CFO Publishing Corporation, which produces CFO magazine in the United States, Europe, Asia and China. CFO Publishing is part of The Economist Group.

About Towers Perrin

Towers Perrin is a global professional services firm that helps organizations improve performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, insurance and reinsurance intermediary services, and actuarial consulting. Towers Perrin has offices and alliance partners in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia and New Zealand. More information is available at www.towersperrin.com.

Findings Indicate Companies Making Incremental Changes in Pension
Plan Design; Regulatory Changes and Financial Climate Driving the
Strategy