Pensions present ‘clear and present danger’ to corporates

Pension risk is no longer just an inconvenience to corporate sponsors but an issue of life-threatening importance, says Hewitt Associates.

Hewitt’s global pension risk survey found nearly 40 per cent of plans had no policy for dealing with their interest rate and inflation exposures, despite the fact that they rated interest rates as the biggest component of their overall risk budget. Of those who had developed their policy on interest rate and inflation hedging, the vast majority intend to remove these risks (eg by way of interest rate and inflation swaps) when they believe prices offer fair value. Those plans that had implemented hedging and associated LDI policies before the recent market decline will have seen their funding levels holding up better during asset falls.

Two-thirds of UK pension plans indicated that they expected to consider buying out all or part of their pension liabilities within the next 10 years. Half of the plans expected to consider this action within the next five years. The price of buyout continues to be the biggest impediment to taking this step, although the accounting impact and reputational risk also feature. The extreme fluctuations and reductions in asset values will only have accentuated the desire of sponsors to buy out, but will have reduced their ability to do so in the short term.

Two thirds of the plans surveyed were closed to new entrants, with only 7 per cent indicating they intended to keep their defined benefit plan open in the long-term. Closure to existing members is less prevalent but around one third of plans had either stopped accrual for existing members or were considering this action. The number of plan closures for existing members is likely to accelerate in the months ahead, as companies deal with the consequences of the market turmoil, which has wiped over £100 billion of value from UK pension plan portfolios Kevin Wesbroom, head of global risk services for Hewitt in the UK, says: “Pension plan risks pose ‘a clear and present danger’ to their corporate sponsors. Since the start of the credit crunch in the last quarter of 2007, pension plan assets globally have plummeted by the staggering sum of $4 trillion. To put that into context, it is an amount three times greater than that used in government bail-outs of global financial institutions.