PLAN SPONSORS FINE-TUNE THEIR PENSION RISK MANAGEMENT FOCUS, ACCORDING TO METLIFE STUDY
-- Third Annual MetLife U.S. Pension Risk Behavior IndexSM Reveals Plan Sponsors Are Reprioritizing Risk and Placing Some Liability-Related Risks Front and Center --
NEW YORK, NY - February 28, 2011 - As economic conditions begin to stabilize, plan sponsors of the largest U.S. defined benefit (DB) pension plans are reprioritizing the risks facing their plans by focusing on a smaller number of risks and paying greater attention to them, according to the 2011 MetLife U.S. Pension Risk Behavior IndexSM (U.S. PRBI), released today. Notably, two liability-related risks – Underfunding of Liabilities and Asset & Liability Mismatch – are front and center in importance in this year’s study. These findings are in contrast to the 2010 U.S. PRBI study when plan sponsors placed nearly equal importance on all risks facing their plan and the 2009 study, which found that plan sponsors were intently focused on the asset side of the asset-liability equation.
The MetLife study, which surveyed 149 corporate plan sponsors from among the 1,000 largest U.S. defined benefit (DB) pension plans, measures plan sponsors’ aptitude for managing – and attitudes about – 18 investment, liability and business risks to which their plans are exposed.
“Plan sponsors are now placing a priority on liabilities in overall pension plan risk management, focusing on a core set of balanced risk factors,” said Robin Lenna, executive vice president and head of MetLife’s Corporate Benefits Funding group.
Overall, the consistency between importance and success for each of the 18 risk items has improved slightly in 2011 over 2010, even though plan sponsors indicate they are not successfully managing the two most important risks facing their plans.
Plan Sponsors Sharpen Their Focus on Liabilities
After the market uncertainty of the past two years that saw DB pension plan assets decline and the value of liabilities rise, plan sponsors are placing emphasis on two key liability-related risks: Underfunding of Liabilities and Asset & Liability Mismatch. And while Underfunding of Liabilities has always ranked high in importance to plan sponsors, this year it was selected as the most important more often than any other risk factor in the history of the study. Specifically, when plan sponsors were asked to indicate the importance of the 18 risk factors affecting their plan, these top two risks were selected as the most important 66% of the time and 60% of the time, respectively.
The third- and fourth-ranked risk factors this year, Asset Allocation and Meeting Return Goals, are investment-related risks. However, their selection rates are much lower than that of the top two risk factors (45% and 41% of the time, respectively), suggesting that plan sponsors are now focused on managing plan assets in the context of plan liabilities.
By comparison, in 2009, these same four risk factors occupied the top rankings, but then the investment-related risks (Asset Allocation and Meeting Return Goals) were ranked first and second in importance, while the liability-related risks (Underfunding of Liabilities and Asset & Liability Mismatch) occupied the third and fourth positions.
“With the top two risk factors on the liability side of the asset-liability equation, followed by two asset-oriented factors, we believe the asset-centric focus on investment returns that characterized the inaugural study in 2009 have given way to one that suggests that there is a growing interest on the part of plan sponsors to manage plan assets in the context of plan liabilities,” said Cynthia Mallett, vice president, Product & Market Strategies, in MetLife’s Corporate Benefit Funding group, who oversaw the study.
At the same time, Liability Measurement, the seventh most important risk factor, was ranked first in terms of success. “Having taken significant steps to better understand their liability-related risks through formal liability measurement such as actuarial valuations, asset-liability studies and other means, many plan sponsors are now taking steps to mitigate them,” added Mallett.
Plan Sponsors Take Deliberate Approach to Pension Risk Prioritization
Plan sponsors’ more concentrated focus on several risks in 2011 highlights one of the shifts in pension risk management over the past year. While, as noted earlier, the top two risks were selected 66% of the time and 60% of the time, respectively, the next two most important risks were selected 45% and 41% of the time. This contrasts with 2010, which was identified as a “democratization” of risk, when the top two risks were selected only 28% and 27% of the time, and the bottom two risks were each selected 21% of the time – indicating that plan sponsors were reluctant to rule out the potential significance of any of the risk factors.
“This year, we saw the range of Overall Importance Selection Rates widen dramatically between the most and least frequently cited across all 18 risk factors, from 8% in 2010 to 62% in 2011. This indicates that plan sponsors are now starting to differentiate among the risks facing their plans – and a core set of four risks may be solidifying,” added Mallett.
Fluctuating Importance Ranking Indicates Some Uncertainty
Despite plan sponsors’ concentration on four top risks facing their plans, a significant amount of variability in importance among the remaining risks over the past three years indicates some uncertainty about which other risks should garner the most attention. Several risk factors, including Meeting Return Goals, Accounting Impact and Investment Management Style, dropped in the importance ranking from 2009 to 2010, but have regained importance in 2011. Conversely, Advisor Risk, Early Retirement Risk and Inappropriate Trading rose in the importance ranking from 2009 to 2010, but fell in 2011.
“Volatility among risk factors indicates that there is a floating group of risks that plan sponsors prioritize in the short-term, but they fluctuate due to outside influences such as economic, labor and market conditions, and legislative and regulatory developments,” said Mallett.
Plan Sponsors Perceive Success in Managing Pension Risk, But Gap Between Importance and Success Remains
Overall, plan sponsors continue to give themselves high marks for successfully managing the risks facing their plans. In 2011, plan sponsors reported that they were successful in managing their risks 79% of the time, compared to 80% in 2010 and 75% in 2009. But, the top two most important risk factors – Underfunding of Liabilities and Asset & Liability Mismatch – ranked 11th and 13th in success, respectively, indicating that plan sponsors are not managing the most important risks successfully.
With funded status continuing to present challenges, plan sponsors remain concerned about their ability to successfully manage the impact of underfunded plans. Similarly, the disconnect between importance and success for Asset & Liability Mismatch may be due to the fact that pension plans underwent significant turmoil over the past two years, with lower asset valuations as a result of market fluctuations, and a rise in liabilities due to a low interest rate environment.
U.S. Pension Risk Behavior IndexSM Value: A Slight Improvement from 2010
The third annual value of the U.S. PRBI is 81 out of 100, a slight improvement from 79 in 2010 and slightly down from 82 in 2009. The Index calibrates the importance that plan sponsors surveyed ascribed to each risk, their reported success at implementing comprehensive practices to manage each risk and the consistency between the two, effectively measure both attitudes toward, and aptitude for, managing pension plan risks.
“This study has become instrumental in tracking how pension risk factors are being balanced, and how well they are being managed,” said Mallett. “Over the next several years, we expect that plan sponsors will deepen their focus on a core set of risks facing their plans, and implement strategies to more successfully manage them.”
About the Study
The MetLife U.S. Pension Risk Behavior IndexSM was conducted in conjunction with two research partners – Bdellium Inc. and Greenwich Associates – during the period of August through December 2010. Commissioned by MetLife, the U.S. PRBI surveyed 149 large plan sponsors (94 of which reported defined benefit assets of more than $1 billion). Interviews were completed by telephone with a web-assisted option, i.e., respondents had the ability to view the risk factors and questions online while answering the survey via telephone. Respondents consisted of senior financial professionals whose primary focus is pension investments, risk management or employee benefits, in addition to corporate management. A complete report of the findings for the MetLife U.S. PRBI (and detailed description of the research methodology) is available at www.metlife.com/pensionrisk.
MetLife, Inc. is 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.