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.”

ICI Offers Alternative to Pickens Plan

A national program known as the Intelligent Community Initiative (ICI) is offering an alternative restructuring operation using interconnected client-server databases and online training, resulting, the company says, in self-sustaining financial communities which are not as vulnerable to global financial collapse.

Through its Business Incubation and Facilitation Division, the ICI provides a network for businesses that are integral to (and support) the community. A not insignificant benefit to this approach, ICI says, is that more tightly linked businesses and individuals beholden to their bonds in the community require much less governmental intervention. The ICI plan radically reduces the need for government regulations that limit efficiency.

In September ICI announced an alternative to the Pickens Plan called Operation Energy Transition (OET). According to ICI analysis, the plan that oil billionaire T. Boone Pickens released in July 2008 intensifies the problems of the Peak Oil crisis by transferring dependence on oil to operate automobiles to dependence on natural gas to do the same.

Intelligent Communities President Barry Krusch says, “Not only does the Pickens Plan fail to provide a solid solution to curtail greenhouse gas emissions, but it also lacks the detailed analysis that any comprehensive plan should include. Briefly put, it is too much Pickens, and not enough Plan”.

While the Pickens Plan recommends ramping up wind energy to feed electric grids for powering urban centers, a strategy also to be deployed by OET, the secondary goal of the Pickens Plan to use natural gas to power automobiles requires not only a significant (and expensive) change to the national transportation infrastructure, it also unfortunately shifts reliance on one fossil fuel to another. Natural gas is nonrenewable, which means that when supplies decrease, prices jump and everyone scrambles to search for the next fuel source. And when other countries join the natural gas craze, the supply further diminishes and prices soar.

The alternative answer proposed by Intelligent Communities, Operation Energy Transition, calls for a ramped-up increase in telecommuting, innovations such as carpooling software and a new mode of transport it refers to as intellitaxis, and an enhanced focus on more commonly known ideas such as alternative vehicles and increasing solar and wind technology and availability. While the Pickens Plan can be described in just 2 or 3 sentences, adequately describing OET takes a wall map, which is conveniently located on the OET site.

“If we’re going to solve the problem, let’s solve it”, Krusch said. “Rolling out a plan which is destined to put America yet again behind the eight ball is not the plan we need: Operation Energy Transition is.”