Managing pension plans is risky business, which means plan sponsors are getting serious about reducing their overall pension risk, according to a recent survey by Hewitt Associates.

In response to soaring liabilities and record-low funding levels, most U.S. companies are taking active steps to reduce their overall pension risk by changing the way they fund, invest and design their defined benefit plans.

Hewitt’s “Global Pension Risk” survey received responses from 153 large employers. Some of its major findings include:

• A majority of employers have adopted funding policies designed to maintain an 80% funded level.
• There is growing interest among U.S. companies to implement dynamic asset allocation strategies, which ‘de-risk’ their pension plans as their plan’s funded ratio improves.
• The number of U.S. employers considering closing and/or freezing their plans in the future has almost tripled compared to 18 months ago.
• DB sponsors are five times more likely than last year to consider delegating their entire investment policy to professional advisers.

The findings are a notable shift from last year’s survey, in which employers recognized the importance of managing pension risk but took only small and conservative steps to protect themselves from volatile economic conditions.

“Risk related to pension plans is having a significant impact on company performance and has become a board-level agenda item for many U.S. companies,” says Ari Jacobs, Hewitt’s North American retirement solutions leader. “Still, many plan sponsors felt unprepared for the most recent wave of funded status volatility and couldn’t respond in a timely and productive manner.”

Meanwhile, most DB sponsors (83%) expect to make additional contributions to their pension plans in order to meet funding requirements. Two-thirds of companies (66%) expect to fund their DB plans to at least 80% to meet the new threshold requirements under the Pension Protection Act of 2006.

Almost 40% of employers have reduced their equity exposure and many organizations are increasing their fixed income allocation with assets that better match liabilities, such as corporate bonds (37%) and/or treasury bonds (19%).

A growing number of companies (15%) are implementing dynamic investment policies, a new framework that defines an asset rebalancing strategy that changes as the plan’s funded ration improves.

“While still an emerging trend, more companies are looking at a rules-based approach to de-risking their pension plans,” says Joe McDonald, Hewitt’s North American risk services leader. “Dynamic investment policies integrate a plan’s asset allocation decision with its funded ratio, so companies can better protect their balance sheets from volatile swings in the funded position of their pension plans,” he adds.

Thirty-one percent of U.S. companies are more likely to consider closing their DB plans today than they were 18 months ago, compared to 11% of companies in 2008. A similar trend exists for plan freezes, with 50% of companies now more likely to consider freezing their plans to existing participants, up from just 17% in 2008.

Outsourcing is a growing area of interest, with more than half (51%) of companies saying they’ve outsourced the performance monitoring of their investments or are more likely to do so, compared to 18 months ago. In addition, DB plan sponsors are five times more likely than last year to consider delegating their entire investment policy to professional advisers, from 4% in 2008 to 20% in 2009.

“Many U.S. companies simply don’t have the knowledge or time to develop a strategy for maximizing asset returns, controlling volatility and decreasing risk in their pension plans,” says Jacobs. “Delegating these responsibilities to an outside provider has become an increasingly attractive option because it can reduce a company’s pension plan costs and enable organizations to devote more resources toward other corporate finance risks and business-critical activities,” he adds.