Search the News Archive

New Study Addresses Pension Risk Management Gaps

Excerpt: Pension Governance, LLC is pleased to make available a new research report that explores current pension risk management practices. In what is believed to be a unique large-scale assessment of pension risk practices since the publication of a 1998 study by Levich et al., this survey of 162 U.S. and Canadian plan sponsors seeks to: (1) understand why and how pension plans employ derivative instruments, if they are used at all (2) identify what plan sponsors are doing to address investment risk in the context of fiduciary responsibilities and (3) assess if and how plan sponsors vet the way in which their external money managers handle investment risk, including the valuation of instruments which do not trade in a ready market. The report was written by Dr. Susan Mangiero, AIFA, AVA, CFA, FRM, with funding from the Society of Actuaries.

Pension Risk Management: Derivatives, Fiduciary Duty and Process (PDF)

64 pages. Excerpt: Recognizing that meaningful change, as needed, cannot occur without knowledge of the status quo, the objectives of this research are threefold – (a) understand why and how plan sponsors employ derivative instruments, if at all (b) identify what plan sponsors are doing to address investment risk in the context of fiduciary responsibilities and (c) assess if and how plan sponsors vet the way in which their external money managers handle investment risk, including the valuation of instruments which do not trade in a ready market.

Highway Bill Brings Rise in Pension Risk

"[The pension provisions of the] just-passed highway bill ... could force costs upward for American businesses. For one thing, sponsors will be able to stretch out their cash outlays to buoy underfunded defined benefit plans over time. As a result, tax-deductible contributions will be smaller in the next few years, taxable income will be higher and federal tax coffers will go up by an estimated $9.4 billion over the next 10 years. In addition, [PBGC] insurance premiums ... will be higher to the tune of roughly $10 billion in the coming decade. The news is troublesome for numerous reasons."

Pension De-Risking Presents Potential Conflicts of Interest

"One company that entered into a pension de-risking transaction cited the upside to include the following: Enhancing the sponsor's long-term financial position; Removing a 'volatile' pension liability from the balance sheet; Reducing cash flow and income statement volatility; and Improving financial flexibility. It is not known yet whether someone will challenge this kind of rationale as being too shareholder heavy or instead primarily in the best interest of plan participants who are impacted by a particular transaction."

De-Risking of Pension Plans, HR Strategy and the Bottom Line

"While true that numerous executives have fiduciary fatigue and want to spend their time and energies on something other than benefits management, it is not always a given that restructuring or extinguishing a defined benefit plan is the right way to go. Indeed, some sponsors have reinstated their pension offerings in order to retain and attract talented individuals who select employers on the basis of what benefits are offered."

Comments: Wobbly Third Leg -- Social Security at Risk

Excerpt: A three legged stool is often used to describe retirement planning: private savings, pension benefits from employers and Social Security. The problem is that each leg is becoming increasingly wobbly.

Can a Retirement Plan Have Too Much Risk Management?

"[T]he critical question is whether investment fiduciaries can be too cautious. Most reasonable people would likely say 'yes.' ... Retirement plan fiduciaries and their advisors are well served by identifying primary goals, major obstacles and both short-term and long-term nightmares that would generate serious pain for participants."

Report Finds Public Pension Valuation Numbers Wanting

"The problems [the Public Company Accounting Oversight Board] found include the following: Insufficient testing of controls over how pension plan assets are valued; Testing of controls that were imprecise and therefore did not allow for an assessment of the risk of material misstatement by plan auditors; Failure to properly test the valuation of pension plan assets; and/or Relying on management or the person(s) who performed the reviews without seeking an independent assessment as to why 'variances from other evidential matter' were occurring."

U.S. Infrastructure and Pension Fund Investment

"[I]nfrastructure investing by pension funds seems like a good idea. There is both a demand for long-term capital and a supply in the form of interested money in search of returns over time. Like any investment and/or strategy however, one needs to weigh risks against expected returns. Currency risk and project completion risk are two considerations. Being able to obtain and properly interpret adequate performance reports is another concern."

Cracks in the Pension Safety Net System?

Excerpt: According to two separate news accounts, cracks may be appearing in the pension back-up systems for the United States and UK, respectively. Already jittery taxpayers may look at these warnings with heightened alarm. In 'Pension Agency Sounds Alarm on Big Three,' Wall Street Journal reporter John D. Stoll (November 28, 2008) writes that the Pension Benefit Guaranty Corporation ('PBGC') is worried that large automakers may offer early retirement or buyout deals to some plan participants, at the expense of those who remain.... In 'Pension lifeboat may be sunk by wave of firms being liquidated' (November 28, 2008), Phillip Inman and Simon Bowers - reporters for The Guardian - write that 'The Pension Protection Fund (PPF), which has already rescued more than 66 retirement schemes, may be forced to increase its levy on profitable companies to boost its finances or risk a government bail-out if more companies go bust.'