Human Capital & Careers

Survey: Pension Plans Equal Risk

Most executives see moderate risk, favor mark-to-market accounting, and advocate annual expense smoothing when it comes to pension plans.
Stephen TaubDecember 14, 2006

Findings from a new study suggest that the growing trend among companies to freeze or close down their traditional pension funds will not abate.

According to a survey conducted by Mercer Human Resource Consulting, 56 percent of companies worldwide reported that their pension plans represent at least a “moderate” financial risk to their organization. What’s more, another 16 percent said the plans posed a “great” risk. Of that 16 percent, 9 percent were U.S.-based organizations. In addition, only 14 percent of U.S.-based companies said that pension plans represented “little or no extent.”

Most of the more than 300 companies surveyed have been proactive about reining in their traditional, defined-benefit plans. The survey found that nearly 60 percent of the companies polled indicated that they have taken, or are planning to take, at least one of the following actions in relation to their pension plans in the next two years: Close it to new hires, freeze/suspend benefits accruals, or reduce the level of benefits provided. More specifically, 42 percent of the respondents reported that they have closed, or are planning to close, their pension plan to new hires. This includes just over 40 percent for U.S.-based participants.

As companies pull back on traditional pension plans, they are ramping up defined contribution plans, such as 401(k) programs in the U.S. According to Mercer, more than half of the respondents (54 percent) noted that they already have introduced, or are planning to introduce or enhance their defined contribution plan. This roughly tracks the sentiment among the U.S.-based participants in the survey.

Altogether, Mercer received 312 responses. More than half (167) of the replies were from organizations based in the U.S., while the remaining responses came predominantly from Continental Europe, the UK, and Canada. Employers with more than 10,000 employees represented 45 percent of all respondents, while 41 percent had fewer than 5,000 employees.

The respondents were also asked which specific elements should be a part of pension accounting standards. Almost three-quarters of respondents (72 percent) indicated that they would prefer that mark-to-market elements (immediate recognition of gains or losses) be part of pension accounting standards for the balance sheet, with the remaining respondents (28 percent) preferring to mark-to-market annually.

More interesting, 61 percent of respondents indicated that pension accounting standards should allow smoothing for the annual expense rather than for the balance sheet (39 percent), according to the report. Many respondents also said they expect to consider changes to their investment policy to help shore up their plans. For example, 30 percent said they plan to increase allocations to fixed income investments, 26 percent plan to increase allocations to hedge funds, private equity vehicles, and/or infrastructure investments, and 26 percent said they will hedge interest rate risk.

“Globally, companies are waking up to the fact they need to manage pension plan funding in the overall context of their corporate finances, rather than as a separate entity,” said Bob Moreen, worldwide partner at Mercer, in a press release. “Letting a plan deficit develop can create a serious dent in profits and affect business growth, so employers can’t afford to disregard the risks.”