Corporate DB Plans Aim to Minimize Global Investment Risk, Survey Says

The survey of 114 cross-border organizations found that more than three-quarters (77%) are seeking to make changes to promote better management of risk globally, while many are considering changes to elements of their governance frameworks.

(August 26, 2010) — According to a recent survey by Mercer, 77% of companies plan to make changes to better manage risk.

The consultancy said given the added complexity of managing benefit plans across borders, schemes had been given a “wake-up call” by the recent downturn in the global financial markets, as significant drops in asset values and the dramatic deterioration of defined benefit (DB) pension plan funding positions put stress on already struggling resources.

“For many multinational organizations, the financial crisis in major markets and the impact on benefit programs were unanticipated, and they paid insufficient attention to risk-management activities, such as scenario planning and extreme-event modeling,” Vicki Stokoe, global governance consulting leader at Mercer, said in a news release. “To make matters worse, companies lacking ready access to key information or without an established decision-making structure struggled to respond quickly and effectively.”

Mercer surveyed 114 companies between October 2009 and January 2010 and found that of those multinational organizations, 16% said they believe their governance structures are sufficient for meeting anticipated needs. Meanwhile, 30% are planning changes to their reporting structures.

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Additionally, the survey found:

93% of respondents confirmed that plans (retirement and benefit plans) are strategically material, thus presenting business and/or strategic risks;
81% said the plans pose a financial risk;
93% confirmed that plans are material from a reputation point of view; and
60% need more information about risk exposure.

In an interview earlier this month with Global Pensions, Bruce Rigby, Mercer global chief retirement strategist, said that more and more multinational companies are developing global pension committees and policies in order to gain a better grasp on their fund liabilities.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(August 26, 2010) — The UK’s Pension Protection Fund (PPF), which covers defined benefit pension schemes of collapsed companies to safeguard retiree payments, announced it would become 110% funded by 2030.

“This strategy makes public the work we have been doing behind-the-scenes since we opened our doors for business more than five years ago,” said PPF Chief Executive Alan Rubenstein in the report. “We think it is important that we expose our plans so we can show how we intend to ensure we have the financial resources needed to pay existing levels of compensation to current and future members of the PPF – and become self-sufficient by the time the level of risk to the PPF from future insolvencies has reduced substantially.”

To become financially self-funded in 20 years, the PPF, which has about 5 billion pounds in assets, aims to eliminate its exposure to interest rate, inflation, and other market risks, while acquiring hedging instruments. While the PPF did not provide specific details on how they plan to accomplish this lofty goal, fund officials said they plan “to invest in a portfolio with zero market risk (by 2030), so that any movements in liabilities are matched by corresponding movements in assets.”

The plan by the PPF has been met with strong support from the industry. Joanne Segars, chief executive of the National Association of Pension Funds, told the Financial Times that the plan was good “not just for those whose benefits it is paying but levy payers, too”. On the other hand, critics of the UK pensions lifeboat claim the fund lacks a long-term future, as it will be forced to impose a higher levy on a smaller pool of businesses as companies close defined benefit schemes in favor of cheaper defined contribution funds, The Telegraph reported.

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According to the latest annual report for the year ended March 31, the PPF’s funding ratio had fallen to 88%, from 91% a year earlier. The PPF funds itself by taking over the assets of schemes which fall under its remit and by charging an annual levy on all corporate pension funds eligible for help.

In total, there are 166 schemes in the PPF. Some 47,610 people are now receiving, or will receive, compensation in the future. The PPF has paid out a total £179 million in compensation so far, with the average yearly payment reaching about £4,000.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742