Market Volatility and Increased Regulatory Pressure Driving Changes in
Pension Plan Design and Investment Strategy, According to Joint CFO
Research/Towers Perrin Survey
TORONTO, Sept. 17 /CNW/ - Market volatility and stringent regulatory
issues are reshaping how North America's pension portfolios are being managed.
More than 75% of senior finance executives across Canada and the United States
said they plan to focus on reducing risk in their defined benefit (DB) pension
portfolios, rather than seek greater return on assets, according to the second
CFO Research Services study conducted in conjunction with professional
services firm Towers Perrin.
"After the highs and lows of the past several years, we're in an economic
environment where being ready for storm conditions is the new normal," said
Monica McIntosh, national leader of Towers Perrin's Asset Consulting practice
in Canada. "The study shows that in this new world, finance executives are
reviewing their pension investment strategy from a broader enterprise risk
perspective to avoid undesirable and unacceptable consequences in terms of
funded positions and company costs."
Increased market risk in a low return environment has forced pension
managers to increase their emphasis on managing risk versus seeking greater
return on assets. More than ever, companies need to use increasingly
sophisticated tools and approaches to protect their investments and ensure
that pension funds deliver the benefits promised to plan participants.
"The Canadian market is already challenged with another 'perfect storm.'
In our view, this is adding to the pressure on government for a complete
overhaul to implement a pension system that works for all stakeholders and
ensures Canadians have adequate retirement income," said McIntosh.
DB Pension Plan Popularity has Waned, but Plans Unlikely to Disappear
Since 2000, the majority of company executives surveyed have made
incremental changes to alter their DB plan designs. Thirty-six per cent of
respondents have closed existing DB plans to new employees while continuing
benefit accruals for current employees, while more than a quarter (28%)
replaced DB plans with defined contribution plans, shifting investment
decisions and risk from the employer to the employee. In addition, while
survey respondents noted there will likely be more incremental changes to come
for DB plans, two-thirds (67%) of companies are not likely to terminate them
outright, at least for the next 24 months.
Executives Rethinking Plan Design
When it comes to plan design, nearly half of all respondents (45%) said
that performance of the economy or financial markets was the biggest external
contributor influencing the decision-making process in DB plan design since
2000. Additional factors include competitors' pension offerings (40%), changes
in retirement program regulations (37%), increased investor demand for profits
and financial strength (18%) and increased scrutiny of risk management
Looking forward over the next 24 months, 62% cite changes in regulation,
legislation or accounting standards as the primary reasons to rethink their
pension strategies. Additional catalysts include recent financial market
events (41%) and changes in company performance (33%) - both of which have
placed tremendous pressure on finance teams and pension portfolios.
"There will continue to be many forces at work that affect the
relationship between a company and its employees," continues Monica McIntosh.
"For many companies, pension plan management will include making simple
changes to policies and portfolios, while for others, the process of
evaluating the trade-offs involved with offering these plans will have broader
implications for companies' financial health and their relationships with both
current and former employees."
Additional Key Survey Findings:
- Only 21% indicated pension risk management is closely coordinated
with a broader risk management framework.
- Twenty-seven per cent noted that liability-based asset management
prevails as the most common risk reduction strategy.
- Companies have managed their asset portfolio risk by altering their
equity portfolios, investing in alternative assets and optimizing
their fixed-income portfolios.
- Nearly half (47%) said that regulatory or accounting requirements
would be the chief obstacles impeding their ability to make timely
decisions or desired changes in DB plans over the next two years.
- Forty-eight per cent indicated that recent trends in the capital
markets and macroeconomic outlook have made their company seriously
consider changing its asset allocation strategies, while 29% said it
made their firm consider altering its DB plan design.
"In our analysis, we found that when pension plans hold significant
assets (when compared to total corporate assets), represent an especially
large or mature commitment to benefits, or have a substantial impact on cash
flow or earnings, companies are consistently more committed to increased
funding of their pension plans in the years ahead," said Sam Knox, Vice
President and Director of Research, CFO Research Services. "But they appear to
be more reluctant to make dramatic changes in the actual design of their DB
plans in the years ahead - or to off-load risk onto third parties. Instead,
they are most likely to address the risk from pensions through asset portfolio
management methods like duration matching in its various forms."
About This Study
The study, Defined Benefit Plans Amid Market Volatility, was conducted
with CFO Research Services, the sponsored research unit of CFO Publishing,
which produces CFO magazine. In March 2008, CFO collected the opinions of 214
senior finance executives across the United States and Canada with DB pension
plans, and whose annual revenues range from $100 million to more than
$20 billion. The full study is available through CFO's Web site
(www.cfo-research.com), and through Towers Perrin's Web site
About CFO Research Services
CFO Research Services is the sponsored research group within CFO
Publishing Corporation, which produces CFO magazine in the United States,
Europe, Asia and China. CFO Publishing is part of The Economist Group.
About Towers Perrin
Towers Perrin is a global professional services firm that helps
organizations improve performance through effective people, risk and financial
management. The firm provides innovative solutions in the areas of human
capital strategy, program design and management, and in the areas of risk and
capital management, insurance and reinsurance intermediary services, and
actuarial consulting. Towers Perrin has offices and alliance partners in the
United States, Canada, Europe, Asia, Latin America, South Africa, Australia
and New Zealand. More information is available at www.towersperrin.com.
Note to editors:
Defined benefit plans are pension plans managed by the employer whereby
the employer (and sometimes employees) makes monetary contributions in view of
providing a retirement income based on years of service.
For further information:
For further information: Keri Alletson, (416) 960-4493,