Retirement Plans

Reaping the Rewards of Lower Risk in DB Plans

Finance executives have been busy de-risking DB plans, and they're happy with the results.
David W. OwensSeptember 10, 2015

These days, how often can you get eight out of ten people to agree on anything? When it comes to taking financial risk out of pension plans, getting agreement turns out not to be as hard as you might think.

Three times over the past six years, Mercer LLC has worked with CFO Publishing to study the direction in which U.S. companies with defined benefit (DB) plans were heading. This year’s collaboration provided survey responses from 213 senior finance executives at companies whose DB plan assets exceeded $100 million. CFO Publishing also interviewed ten finance executives to flesh out the main findings from the survey.

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This year, we asked how satisfied companies were with the specific actions they’ve taken so far to manage pension risk. One key area we explored was the trend toward liability-driven investment (LDI) strategies. As part of this, we examined the prevalence of plan sponsors increasing allocations to fixed-income investments, adjusting the duration of fixed-income investments to hedge plan liabilities, and making greater use of synthetic financial instruments and derivatives.

We also took a closer look at dynamic de-risking or glide path strategies—that is, building in “triggers” for moving pension investments into less risky instruments, once certain milestones have been reached. In all cases, if a company had done it, then they were highly satisfied with the results. For any of the actions taken, more than 80% of respondents reported that they were either satisfied or very satisfied with the outcomes. When it came to dynamic de-risking, satisfaction neared 90%.

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That may explain why many survey respondents were planning more of the same. Just under two-thirds intended to implement or increase dynamic de-risking activities either this year or next. Six out of ten planned to increase fixed-income allocations and to adjust durations, while somewhat fewer (45%) planned on making greater use of synthetic instruments and derivatives.

At least when it comes to DB plan de-risking, then, it seems that finance leaders believe you really can’t have too much of a good thing.

For the full report, “Taking the Next Step in Pension Risk Management: Planning to Move Ahead,” visit http://www.cfo.com/research