Study: Liability Risk Prominent in US and UK

(November 22, 2011) – A new study by Metlife indicates that plan sponsors in both the United Kingdom (UK) and United States (US) rank underfunding of liabilities as the most important risk facing pension plans.

Measurements taken by the 2011 MetLife US Pension Risk Behavior Index  (US PRBI) and 2011 MetLife Assurance UK Pension Risk Behaviour Index (UK PRBI) show that “Underfunding of Liabilities (US)/ Funding Deficits (UK) ranked first in both countries.”

In the US ranking, “the underfunding of liabilities has always ranked high in importance in the US—it was ranked second in the 2010 US PRBI study and third in the 2009 US PRBI study—in 2011 it was selected as important more often than any other risk factor in the history of the US PRBI study.” Sixty-six percent of the time it was presented as an option in 2011 it was chosen; in 2010, that figure was 28%.

Additionally, the study asserts that for the US, when “Underfunding of Liabilities and Asset and Liability Mismatch…are taken together with the results for the third and fourth ranked asset-related risks—Asset Allocation (45% selection rate) and Meeting Return Goals (41% selection rate)—it suggests that these four factors are viewed in a connected manner by a significant number of US plan sponsors.”

In the UK, funding deficits—effectively the same risk factor, according to Metlife—“moved from the fifth most important risk in 2010, to the most important risk in 2011.” In 2011, it was chosen as “most important” 58% of the time it was presented—compared to 27% in 2010.

Additionally, Metlife asserts that “the emphasis on Funding Deficits in the UK has been accompanied by a concentration on the Employer Covenant, selected as the second most important risk in 2011.” Employer Covenant held the same position in the 2010 index. However, its “Importance Selection Rate” went from 28% to 49% in the past year.