North America’s first buy-in deal in May (transferring a $75m deal) last year led many to predict a boom in the pension de-risking market. Yet while the number of sponsors eager to reduce the risk of their pension liabilities hits an upward curve, schemes continue to question whether plan sponsors should be more cautious than their counterparts, in the UK and Europe, sentiment which is echoed by the US based Society of Actuaries[1].
A recent Clear Path Analysis survey found that 98% of North American pension schemes and their company sponsors believe that if the de-risking market is to see significant growth, providers must undertake a full strategy analysis, so that they understand and immunise their liabilities effectively. However, LDI fund managers and longevity hedging providers argue that it’s more important to consider developments in other countries, to learn from their mistakes.
Company sponsors are eager to reduce the risk of pension plan liabilities getting any bigger, and with ongoing uncertainty and fluctuating valuation of pension plans in the region, the Pension Plan De-Risking; North America report hears from industry experts on current trends in the marketplace and the options available to them.
Dylan Tyson, Senior Vice President at Prudential Retirement, states: “Companies that don’t have a competitive advantage managing pension liabilities should consider de-risking.”
His colleague Scott Gaul, Senior Vice President at Prudential Retirement, also considers the growth potential in the market: “From what we see, many companies are holding a disproportionate amount of risk in their pension plans and we feel that it is prudent for businesses to begin the process of de-risking and aligning risk, towards their core investments.”
However, he goes on to warn of the complexities surrounding current interest rates: “This is just one of the many risks facing plan sponsors. CFOs know interest rates are going up but the risk is more complicated than the 10 or 30 year treasury doing the same. It’s important for companies to understand that they can begin transferring risk without materially changing their interest rate risk exposure.”
Meanwhile Glenn O'Brien, Managing Director, Institutional Investments at Prudential comments on future trends in the US pensions plan sphere: “A fundamental trend, which has already had a major financial impact in the UK, will be increased longevity. People are living longer and we have not recognized the full impact of that yet but the economic response will be real so there will be materially different assumptions around mortality.”
Valter Viola, Head of Pension Risk Solutions at Algorithmics, an IBM Company warns that: “To avoid repeating past mistakes, DB pension plans need an effective and thorough process for making risk decisions. While an aging population provides a good reason to de-risk these days, other reasons for doing so may be worrisome.”
“The recent financial crisis and the ‘perfect pension storm’ that preceded it, characterized by falling stocks and falling interest rates, has been a catalyst for de-risking. The response to these extreme events may be an overreaction to recent pain and is an indication that certain risks need to be better understood, despite evolving accounting standards which make some of these risks more transparent.”
He goes on to mention that: “DB plans need a risk framework to define risk parameters; articulating risk appetites is not easy and the first challenge is that many people do not understand the language of risk very well. DB plans should adopt a practical framework, which develops an explicit risk budget, reports risks more frequently and sets policies at acceptable levels of risk. By doing so, they are less likely to repeat past mistakes. As Keynes warned us, however, this is easier said than done!”
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