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Contact: John Hodgson
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2008 Survey of pension financial risk (PDF)

2009/2010 survey of pension financial risk

Last updated: 19 May 2010

During late 2009 and early 2010, Mercer and the Association of Corporate Treasurers approached the chief financial officers and treasurers of substantial companies to take part in their fifth survey on managing pension financial risk. This survey sought to determine:

The extent to which pension schemes and their deficits are viewed as significant corporate risk issues

Perceptions of stakeholder attitudes and pension accounting measures

The prevalence of some specific and topical risk management actions

Key findings

As in our previous survey, the latest findings suggest that recent market events have led to stakeholders viewing pension risks as being more important than ever.

Around half of respondents have received requests by their scheme trustees to provide additional financial support as a result of falls in their schemes’ funding levels – with cash injections being the most common form of additional support requested. Where such requests were received, the majority of participants had agreed to some form of additional support, and cash was also the most common form of support offered. A desire to reduce Pension Protection Fund levies and assistance in broader pension negotiations were other drivers for companies to provide support to trustees.

Just over half of respondents indicated that as a result of recent falls in pension scheme funding levels owing to mismatched assets and liabilities, they are now more likely to reduce their exposure to risk. However, the majority viewed this as a long-term project.

Although the majority of respondents indicated that they were keen to de-risk, around 65 percent did not view the purchase of a bulk annuity policy, followed by a wind-up of the scheme, as their ultimate goal – with the presumed alternative being to run the scheme down on an ongoing basis. In general, respondents felt that the bulk annuity market offered less competition than we believe to be the case, although this may be a perception carried over from lighter annuity market activity observed in late 2008 and early 2009.

More than half of respondents indicated that they had used derivatives in their pension schemes, mainly for currency hedging. Of those undertaking interest rate and inflation hedges, this was mostly carried out directly, using interest rate and inflation swaps, with around one-third making use of pooled funds (“bucket funds”) to achieve the hedge. In general, reported derivative use had increased markedly since our previous survey in 2008.

Most respondents had a balanced or positive view on the recent announcements by the Pensions Regulator around funding in the current economic climate, although a significant minority viewed these as negative or unclear.

The majority of respondents expressed a negative view on current pension accounting rules as an objective and transparent measurement of pension costs. In addition, the majority of respondents had concerns that users of accounts do not understand the true business impact of pension obligations. Additional disclosure on sensitivity to changing actuarial assumptions was seen as one potential step towards clearer pension accounting.

Comment

Our survey highlights a continued trend for corporate stakeholders to take increasing interest in the business risks posed by pension obligations.

Willingness to manage pension-related risk is now widespread, although this is largely seen as a medium- to long-term process, probably to be achieved in incremental steps. Based on our experience, this is quite likely owing to the perceived pricing barriers to many risk-reducing investment strategies, with yields on long-dated gilts in particular viewed as being well below a longer-term level. With scheme funding levels having improved since these responses were considered, it will be interesting to see whether companies and trustees look to “lock in” some of the gains by reducing risk exposures.

The provision of additional support to trustees likely coincided with significant falls in funding levels seen around the beginning of 2009 and perhaps highlights stronger company cooperation than has been seen historically. That said, most companies also saw material secondary benefits to offering the support. Following recent rises in asset levels, such actions may become less frequent over the coming years. For those companies who did inject cash during 2009, we would expect their investment to have been rewarded with significant growth as markets have recovered.

A majority of companies would still prefer to run their pension schemes on an ongoing basis rather than moving the obligations to an insurer at what is perceived to be a higher cost. To the extent that risk management and “in-house” management are key aims, the use of risk-controlling assets – such as equity options, bonds, swaps, longevity insurance, etc. – seems likely to increase in coming years.

Finally, we noted significant concerns over the fitness of current accounting standards for their supposed purpose. However, there was no broad consensus on how the standards should be adapted – a quandary that we see in many discussions of this topic.