Top 10 priorities for DB plan sponsors in 2012

Controlling funded status volatility Controlling funded status volatility

Nearly three-quarters (70%) of those surveyed ranked this as a “high” priority, while almost half (43%) ranked it as an “extremely high” priority for 2012. “As markets continue to be volatile, plan sponsors continue to pursue sophisticated risk management strategies designed to better control volatility of the funded status of their pension plans,” says Jon Waite, director, investment management advice and chief actuary with SEI’s institutional group.

Improving plan’s funded status Improving plan’s funded status

Of those plan sponsors identifying the need to develop strategies to improve the plan’s funded status, more than half (69%) said it was at least a high priority for 2012. According to the Milliman Pension Funding Index, the average funded ratio of U.S. corporate pension plans dropped to 72.4% in December 2011. The funded status decline was primarily due to higher liabilities caused by a decrease in corporate bond interest rates. With interest rates expected to remain low, many plan sponsors will be forced to contribute to their pension plans this year in order to meet Pension Protection Act funding requirements.

Managing duration moving forward Managing duration moving forward

Duration measures a change in value for both assets and liabilities based on interest rate movements. A mismatch between the duration of a plan’s assets and the duration of a plan’s liabilities can result in significant swings in a plan’s funded status. More than half (52%) of plan sponsors selecting this concern said it is at least a high priority this year.

Implementing a liability-driven approach using long duration bonds Implementing a liability-driven approach using long duration bonds

Long duration bonds remain a popular investment choice in hedging against risk because they closely mimic liabilities, increasing in value as interest rates drop. In a continued low interest rate environment, more than half (55%) of those polled identified the need to implement an LDI approach using long duration bonds as at least a high priority for their organization this year. For more on this topic, read Pension plans increase use of liability-driven investing.

Providing senior management with long-term pension strategies Providing senior management with long-term pension strategies

Underfunded pension plans continue to have a direct impact on corporate balance sheets and draw scrutiny from investors, creditors, analysts and the public. Senior management and board members are placing increased focus on the development of long-term pension strategies to better align investment decisions with overall corporate finances. Almost half (48%) of those polled indicated a need to provide long-term pension strategy to senior management and board members as at least a high priority in 2012.

Other top priorities Other top priorities

Rounding out the top 10 concerns are:

  1. 6. Stress-testing the portfolio to gauge its ability to withstand extreme macroeconomic environments

  2. 7. Conducting an asset-liability study

  3. 8. Implementing an asset allocation process aimed at exploiting shorter-term market inefficiencies to add return and/or mitigate risk

  4. 9. Changing funding policies and timelines

  5. 10. Defining fiduciary responsibilities for trustees and investment consultants

Defined benefit plan sponsors say controlling funded status volatility will be their top priority this year, according to a poll from SEI. The poll surveyed 50 executives overseeing U.S. corporate DB plans that range from $25 million to $10 billion in assets. Here’s a list of their other top concerns.

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