Research Looks at Retirement Plan Risk Management

The Society of Actuaries and Pension Governance, LLC has released a new research report that explores current pension risk management practices.

The 69-page study by Susan Mangiero looks at the responses of 162 retirement plan decision-makers in the United States and Canada.

In answering broad questions, a majority of surveyed plan sponsors describe themselves as doing all the right things to manage investment, fiduciary and liability risks. However, answers to subsequent questions – those that query further about risk procedures and policies at a detailed level - do not support the notion that pension risk management is being addressed on a comprehensive basis by all plans represented in the survey sample.

Respondents cite numerous reasons for not using derivatives directly, including, but not limited to, "Lack of Fiduciary Understanding", "Perception of Excess Risk", "Considered Too Complex", "Prohibition Against Possible Leverage" and/or "Defined Benefit Plan Risk Not Considered Significant".

Survey respondents seem to rely mainly on elementary tools to measure risk, also worrying about the future, ranking "Accounting Impact" as a concern. Other concerns were also noted to include "Regulation," "Longevity of Plan Participants" and "Fiduciary Pressure."

“A global derivatives market in excess of $600 trillion is hard to ignore,” says Mangiero, “yet most are unaware of how plan sponsors employ futures, options and swaps, if at all. Statutory reports about pension economics are often no longer relevant by the time they are released to the general public. Allowing that derivative instruments can help or hinder, the impact of a poor pension risk management strategy is potentially devastating and might lead to financial ruin for employees who assume that financial managers make sound decisions on their behalf.”