These trends are partly the result of increasing longevity of careers and lives of the general population of North America. The Society of Actuaries released mortality tables for pension plans late last year, which again raised the lifetime of assumed pension plan participants.
As a result DB plans will have increased pensions liabilities and plan sponsors have had to review future benefit retirement obligations. However, with the turnaround in the economy, pension plan managers now have an opportunity to consider other options when looking to transfer their pension risk, such as LDI strategies, additional voluntary pension contributions or offering a lump sum for DB participants.
The survey, which was sponsored by Prudential Financial also covers the impact of rising interest rates. Respondents included high profile CIOs, Finance Directors and Pension Plan Managers in the US and Canada working on private pension plans. Those surveyed are responsible for managing AUMs between $500 million and $15 billion.
Rohit Mathur, Senior Vice President of Global Product and Market Solutions at Prudential Financial said the trends are showing that pension risk management remains a principal concern for plan sponsors. “ Escalating longevity, ongoing market volatility, unpredictable funding requirements and asset/liability mismatch are all contributing to significant risk over the long term. In response, sponsors are exploring their de-risking options,” Mathur said.
Pension plan managers are starting to use more sophisticated strategies in an attempt to reinvent their de-risking tactics and find new ways to meet liabilities. However, uncertainty remains about how effective strategies will be at reducing pension volatility with continually increasing longevity.
Mathur continues: “We’re seeing heightened awareness of longevity risk and its effect on pension liabilities. Sponsors are experiencing an increase in pension liabilities and financial leverage, and taking steps to better manage that risk.”
The survey findings come as the North American economy improves, and participants in the region continue to diverge from the slower European market. Rising interest rates are set to pose a threat to the risk transfer marketplace and traditional liability-driven investment strategies. What is clear is that as liabilities increase managers need to carefully manage how they de-risk.
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