Mercer identifies top pension risk management priorities for 2013

Many pension plan sponsors will enter 2013 facing significant increases in their pension funding deficits, which will lead to potential balance sheet adjustments and higher P&L expense, according to Mercer. In this environment, Mercer has identified five top pension risk management priorities for 2013.

1. Review the plan’s funded status frequently as the foundation for establishing outcome-oriented goals. Funded status monitoring should include an analysis of all the factors that affect the ratio of assets to liabilities, including interest rate and credit spread movements, equity performance, as well as contributions and benefit payments. This is a first step in understanding the underlying health of a plan’s funding position and identifying the factors that could impact the plan in 2013 and beyond, according to Mercer.

2. Understand how the range of possible market conditions and changes in funding status could affect the corporation’s cash flow, balance sheet, and reported earnings. Now is the time to conduct the “what if” scenario analysis for 2013 and beyond and continue to assess whether to take advantage of the funding flexibility offered by MAP-21. While the legislation provides temporary relief related to the timing of contributions, Mercer says it does not reduce the true economic value of pension liabilities, and it also increases PBGC premiums significantly.

3. Develop a formal de-risking plan. There have been several opportunities since 2000 to take risk off the table as funded status improved, Mercer notes. Yet most sponsors did not take advantage of these market windows, as they did not have a plan in place to know when to reduce overall plan risk, nor did they have the time, resources and specialized investment expertise. According to Mercer, plan sponsors should develop a roadmap to de-risk the plan that can be executed quickly, as and when opportunities arise. This roadmap might include plan design changes, investment allocation movements, fixed income portfolio construction, and risk transfer components. There is no “one size fits all” de-risking plan for plan sponsors, so careful thought needs to go into developing and executing these plans.

4. Consider liability transfer options. Mercer notes that General Motors and Verizon both entered into landmark annuity purchases in 2012 that introduced game changes to the risk transfer landscape. In addition, a number of major plan sponsors have offered cashout options to their former employees and in some cases have offered cashout options to current retirees. Mercer expects that this trend will accelerate in 2013 and beyond. Advantages of risk transfer strategies include reduction of funded status volatility from mark to market gains and losses as well as the opportunity to reduce plan expenses arising from PBGC premiums, administration and investment costs. Mercer recommends that sponsors planning to implement these strategies in 2013 begin planning now to maximize the effectiveness of the program.

5. Review a governance structure and decision-making process. Since market volatility can create opportunities that last for only a brief time, adopting an appropriate governance model is critical, Mercer says. This should include an assessment of current resources, as well as any additional tools and resources that may be required within a de-risking framework. With increased focus on funded status and timely asset allocation shifts based on triggers, this may include delegation of investment monitoring and execution to a third party who can measure asset and liability values daily and then act quickly to take advantage of these opportunities.

Source: Mercer press release, December 6, 2012.

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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