Ongoing market volatility keeps pension schemes firmly focussed on funding deficits

With significant fluctuations in scheme assets and liabilities, mainly as a result of the volatility in equities and rising bond prices, funding deficits remains the most important risk facing scheme sponsors and trustees for the second year in a row, according to the 2012 UK Pension Risk Behaviour IndexSM (“PRBI”). Indeed many pension schemes may have also seen their liabilities grow due, in at least part, due to low corporate bond and gilt yields, and continued uncertainty around the Eurozone.

Funding deficits was selected 67% of the time by respondents when compared with other risks compared with 58% in 2011 and just 27% in 2010 highlighting how acutely important the effect of current economic conditions on a schemes’ funded status is. However it was only ranked 14th in terms of success at managing the risk compared with 12th in 2011 and 13th in 2010.

MetLife Assurance believes continuing volatility will mean even greater attention being paid to managing the risk and advises scheme sponsors and trustees to consider incorporating agreed funding triggers for de-risking the scheme in order to protect it.
As Defined Benefit (“DB”) scheme sponsors and trustees in the UK work to put their schemes on a more stable footing amid continued market volatility, scheme trustees’ confidence in their ability to successfully manage the DB risks facing their plans may be waning. The study of 89 sponsors and trustees analysed how each group viewed 18 investment, liability and business risks that affect their pension schemes, and assessed how well they believed they were managing those risks.

Wayne Daniel, Chief Executive Officer of MetLife Assurance Limited, commented: “Scheme sponsors and trustees continue to face unprecedented challenges on the economic and regulatory front. Volatile markets, driven in part by the Eurozone crisis, have demonstrated how quickly and significantly pension liabilities – and funding deficits – can change. As a result, we expect sponsors and trustees to pay even greater attention to the connection between investment strategies and the risks that impact a scheme’s funding status. Additionally, scheme sponsors and trustees should consider incorporating triggers for de-risking the scheme in order to protect it.”

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The ranking of Funding Deficits as the most critical risk according to both sponsors and trustees is reflective of the degree to which this risk weighs on their minds and how pivotal design and implementation of investment strategies, that effectively manage contribution levels, are to pension risk management. Fundamentally, whilst the overall funding position of schemes may be improving, on an individual scheme basis, the lack of a consistent and sufficient funding level is not inspiring confidence among either of the two groups.

The results of the 2012 UK PRBI demonstrate that scheme sponsors and trustees are continuing, and strengthening, their focus on a handful of key risks with funding deficits at number one. The overall Importance Rankings for the top four risks remained consistent from 2011 to 2012.

The range between the Importance Selection Rates for the most important risk and least important risks this year is 66 percentage points, compared to 57 percentage points in 2011. This continues the trend established in the inaugural UK PRBI in 2010.

Scheme sponsors and trustees continue to move toward a co-ordinated holistic approach to pension risk prioritisation, according to the 2012 UK PRBI. The importance rankings between trustees and sponsors are aligned within one or two ranking spots for all but one risk factor: Asset Diversification. Trustees rank this fifth in importance whilst sponsors rank it 10th.

Wayne Daniel Concluded: “It is encouraging to see scheme sponsors and trustees continuing to develop a more co-operative relationship to ensure the protection of their members’ benefits. As this co-ordinated approach continues, it will pave the way to well-considered, integrated solutions as market conditions permit in the future.”