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U.S., U.K. Pensions Fail to Manage Risk Well: Study

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They say acknowledging that you have a problem is half the battle, but corporate pensions in the United States and the United Kingdom appear to be losing. A report released Wednesday from MetLife found that while both countries cite underfunding liabilities and deficits as the greatest risks to their pension plans, neither have made many inroads in successfully managing it.

The report is based on data from the 2011 MetLife U.S. Pension Risk Behavior Index and the 2011 MetLife Assurance UK Pension Risk Behaviour Index, which surveyed plan sponsors in the U.S. and scheme sponsors and trustees in the U.K. on 18 investment, liability and business risks to which their plans are exposed.

In 2010, plan sponsors rated the 18 risk factors named in the survey as equally important. In 2011, however, sponsors are focusing on a more narrow set of risks. The new report found that respondents in the United States chose underfunding liabilities as the most important risk factor when given a list of factors to select from 66% of the time. In the United Kingdom, funding deficits were cited as the most important risk factor 58% of the time.

The report also found that asset and liability mismatch ranked as the second biggest risk to pensions in the United States, and the third in the United Kingdom. “This is notable for the [United States], where until recently, assets rather than liabilities have been the main concentration of pension plan management, and any collective focus on assets and liabilities has typically centered on reporting rather than analysis,” according to the report.

“While plan sponsors in the U.S. and scheme sponsors and trustees in the U.K. are both focused on liability management, there are key differences in their approaches,” Cynthia Mallett, vice president of corporate benefit funding for MetLife, said in a statement. “Our research shows that U.K. respondents may be more concerned about securing contributions to their scheme in order to meet their obligations, whereas U.S. plan sponsors are more concerned about seeking excess returns from their assets to meet their liabilities.”

Although plan sponsors in both countries named underfunding as the biggest risk to pension plans, it was just the 11th most successfully managed risk in the United States and the 12th in the United Kingdom. Similarly, the United States’ second biggest risk, asset and liability mismatch, was ranked the 13th most successfully managed risk.

Liability measurement ranked as the seventh most important risk factor for both countries, falling from the most important factor in the 2010 study. Sponsors indicated this was their most successfully managed risk.

Inappropriate trading was the second most successfully managed risk in the United States, followed by asset allocation, but U.K. counterparts struggled to manage these factors. For U.S. and U.K. respondents, longevity risk is the least well-managed risk.

According to the report, plan sponsors in the United States are likely to continue to focus their risk management efforts on a select number of risks. “In 2011, plan sponsors are in good position to tackle the top tier of liability- and investment-related risks […] that could positively impact their plans’ funding positions, and in turn, their companies’ balance sheets.”

A report released Monday by Greenwich Associates found that managing volatility is the top priority for corporate plans, which are consequently moving out of domestic equities and into fixed income and alternative assets.

The report, the “2011 United Kingdom Investment Management Study,” also found that half of U.K. corporate plan sponsors are employing an investment consultant specifically to advise their corporate CFOs about pension issues.

In the report, Greenwich Associates found the average funding ratio for corporate plans in the United Kingdom rose to 84% from 80% in 2010, although they remained “well short” of 2007-2008 levels. Many plans are closed to new employees and 10% enhance incentives to encourage participants to move into defined-contribution plans.

Greenwich interviewed 359 professionals at the largest pension funds in the United Kingdom for the survey.


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