Human Resources: 10 financial resolutions for pension plan sponsors in 2010

New York, January 14, 2010
Defined benefit (DB) pension plan sponsors are starting 2010 with renewed optimism, as capital market returns – and pension plan funded positions – have improved from the lows seen early in 2009. Yet sponsors should temper this optimism with a drop of caution, because many issues that arose during the economic downturn still exist. In light of these concerns, Mercer has identified 10 key issues pension plan sponsors should examine for opportunities to improve their plans’ financial and regulatory footing.

“Risk in pension plans can no longer be viewed strictly in terms of investment risk/return tradeoffs,” said Asghar Alam, leader of Mercer’s US retirement, risk and finance business. “Changes in accounting and funding rules, and in the levels and sophistication of stakeholder scrutiny, are changing the focus. ‘Pension risk’ is most properly defined in terms of the impact on corporate financial objectives and position.”

Employers should resolve to explore the following 10 key areas affecting DB plans.

Reduce pension risk and required contributions. Many pension sponsors have already made several key decisions regarding the methods used to calculate the funding of the plan but now there is a one-time opportunity to make another election – adopt segmented rates and you can lower the 2010 minimum required contribution and reduce long-range pension risk.

Avoid surprise contributions. Changes to plan provisions or negotiated benefits may require an immediate cash outlay by the pension sponsor. Therefore, any impending changes should be carefully analyzed to determine their potential effect on the funding requirements and the possible benefit restrictions if contributions are not made timely.

Educate fiduciaries about pension plan risk. Many plan sponsors who thought they understood pension plan risk have realized that they did not. Sponsors should regularly review multi-year forecasts of the plan’s funded status reflecting a robust set of varying economic scenarios so that they have a solid understanding of potential financial commitment they may face in the distant or not-so-distant future.

Understand benefit restriction triggers and funding certifications. Amendments to plan provisions or special events such as a plant shutdown can trigger immediate benefit restrictions. They may also require immediate updates to funded-status certifications to avoid potential plan disqualification. Pension sponsors should review their governance structure to ensure effective coordination with all parties involved in such transactions or events, as well as the actuary.

Anticipate new PBGC reporting requirements. The Pension Benefit Guaranty Corporation (PBGC) is likely to add new “reportable events” requirements in 2010 and has also proposed eliminating most automatic waivers and filing extensions. These changes will increase a sponsors’ reporting burden and may have secondary effects, such as triggering disclosures under debt covenants.

Consider delegating investment discretion. Effectively managing a pension plan takes resources, time and specialized investment expertise. Many sponsors cannot adequately staff to handle the increasingly complex plans making it difficult to properly react to capital market changes and opportunities. Sponsors should consider whether delegating investment decisions to a qualified fiduciary may better meet both sponsor and plan objectives.

Revisit the investment manager structure. Given the upheaval in financial markets and an unclear future, take an initial step and re-visit the entire investment manager structure. Next, review how each asset class is structured and finally, re-evaluate the fees charged by managers.

Review and verify risk tolerance. Increased market volatility has certainly shed light on the riskiness of certain investment products. This is a good time to reassess attitudes about risk, especially within alternative investments and other derivative-based products. Does taking on increased risk meet the overall objectives of the plan?

Set guidelines to avoid conflicts of interest. US Department of Labor (DOL) and Internal Revenue Service auditors are looking for potential conflicts of interest with anyone who may influence investment decisions. DB plan sponsors should set formal guidelines around this process including standards regarding gifts from current or potential vendors.

Take steps to prevent fiduciary pitfalls. When audits – or lawsuits – occur, the DOL, the Securities and Exchange Commission, external auditors and courts focus on the fiduciary decision-making process, not just the outcomes. Sponsors should review their own structures – including the roles and responsibilities of the benefits committee – to verify proper accountability, oversight and overall compliance.

Mercer has also compiled a companion list of resolutions for defined contribution plans, which can be viewed at http://www.mercer.com/10for2010.

About Mercer
Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer’s investment services include investment consulting and multi-manager investment management. Mercer’s 18,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges. For more information, visit www.mercer.com.