COMPARISON REVEALS THAT A BROAD VIEW OF PENSION RISK MANAGEMENT IS EMERGING ON BOTH SIDES OF THE ATLANTIC, ACCORDING TO METLIFE RESEARCH
New York, NY December 07, 2010
As both the United States and United Kingdom begin to emerge from what has arguably been the most turbulent and difficult economic climate in many decades, new research from MetLife finds that those responsible for pension risk management on both sides of the Atlantic are doing a comparable job managing pension risk overall, but as a result of different drivers. To assess the current state of pension risk management, MetLife in the US and MetLife Assurance Limited in the UK commissioned research earlier this year of US plan sponsors and UK scheme sponsors and trustees, respectively. A new report released today, Comparing Pension Risk Attitudes and Aptitude in the United Kingdom and United States, juxtaposes the findings of two studies, the MetLife US Pension Risk Behavior IndexSM and the MetLife Assurance UK Pension Risk Behaviour IndexSM. The new report is available for download at www.metlife.com/pensionriskusuk.
"In both countries, the current market environment has underscored the need to better understand and effectively manage pension plan risk exposure in order to protect the benefits of current and future retirees. As a result, those responsible for pension risk management in the US and UK are taking a broad, though different, view of various investment, liability and business risks to which their pension plans are exposed," said Robin Lenna, executive vice president, Corporate Benefit Funding, MetLife. “In the U.S., this is quite a shift from two years ago when our research revealed that plan sponsors were narrowly focusing on only a handful of risks to which their plans were exposed.”
US and UK Index Values Virtually Identical
As part of the original research, MetLife developed a Pension Risk Behavior IndexSM (PRBI) value, which calibrates the importance that the survey respondents ascribed to each risk, their self‐reported success at implementing comprehensive practices to manage each risk and the consistency between the two, effectively measuring both attitudes toward, and aptitude for, managing pension plan risks. Comparing the values, the PRBI Index in the UK (78 out of 100) is virtually identical to the US (79 out of 100) indicating that plan sponsors in both countries do a comparable job overall, albeit as a result of different drivers, and indicates that they report to be successfully managing the risk factors that they deem most important.
Risk Priorities Vary
While the Index scores for both the US and the UK are virtually identical, their priorities when it comes to ascribing importance to certain risks vary significantly.
Collectively, the five risk factors ranked highest in importance in the UK were Measurement of Technical Provisions/Liabilities, Longevity Risk, Employer Covenant, Investment Management Style and Funding Deficits, whereas in the US the “most important” risk factors were Liability Measurement, Underfunding of Liabilities, Plan Governance, Asset Allocation and Advisor Risk.
There are some notable differences in the importance rankings between the UK and US. For example, Longevity Risk is much higher in importance in the UK (tied for #2); whereas in the US, it’s only ranked #10 in importance; Plan Governance ranks #3 in the US while its UK counterpart, Scheme Governance, is ranked #12.
"The differences in importance ascribed to various risks among US and UK pension managers highlight the dissimilar nature of the two pension markets. In the UK, Longevity Risk is much more of a concern, likely because of the UK's more common inflation adjusted pension structure, as the cost of indexed pensions is much more susceptible to changes in life expectancy than a fixed nominal pension," said Cynthia Mallett, vice president, Corporate Benefit Funding, MetLife. "And in the US, the importance of Advisor Risk suggests that some plan sponsors feel that they may not be able to rely on their advisors to the same extent they once did when consulting assignments were more standardized."
Gaps Between Importance and Success
Respondents to both studies were also asked to indicate the extent to which they agreed that they managed each risk factor successfully. According to both studies, plan sponsors in the US and scheme sponsors and trustees in the UK both gave themselves high marks for successfully managing risk overall. In the US and UK, respectively, 79% and 80% of the respondents believe they are successfully managing risk.
However, not all risk factors that were deemed most important were rated as successfully managed. In fact, there are several risk factors among both US and UK sponsors that are classified as high importance, but fall into the low success category:
|High Importance/Low Success: UK||
High Importance/Low Success: US
Underfunding of Liabilities
|Investment Risk Profiling||
Fiduciary Risk & Litigation Exposure
Ability to Measure Risk
Asset & Liability Mismatch
|Asset & Liability Mismatch|
|Meeting Investment Return Targets|
"In an ideal world, plan sponsors and trustees in both countries would be highly successful at managing the most important risk factors. These differences show room for improvement when it comes to plan sponsors on both sides of the Atlantic managing risk exposure to protect the benefits of current and future retirees,” added Mallett.
About the Research
A complete report of the findings for the MetLife US Pension Risk Behavior IndexSM (and detailed description of the research methodology) is available at www.metlife.com/pensionrisk. The MetLife Assurance UK Pension Risk Behaviour IndexSM (and detailed description of the research methodology) is available at www.metlifeassurance.co.uk.
MetLife is a subsidiary of MetLife, Inc. (NYSE: MET), a leading global provider of insurance, annuities and employee benefit programs, serving 90 million customers in over 60 countries. Through its subsidiaries and affiliates, MetLife holds leading market positions in the United States, Japan, Latin America, Asia Pacific, Europe and the Middle East. For more information, visit www.metlife.com.