Having an effective global retirement strategy helps employers to make effective decisions and to anticipate change in a constantly evolving landscape.
Managing market volatility for defined benefit plans
DAVID FINN: Most companies have closed their defined benefit pension plans around the world. However, stopping new benefit accrual does not mean that the plans have gone away. In 2022 there are over $26 trillion of defined benefit pension assets and liabilities globally. A colossal sum for the pension community to manage in the coming years.
Financially, the legacy plans present a lot of volatility. In 2022, we saw movements in price inflation and interest rates, causing large changes in pension metrics. This led to direct impacts on Company Accounting results and cash contributions. From the perspective of risk management, the UK liability-driven investment challenge in late 2022 demonstrated that strategies thought to be safe havens had substantial gaps under certain stress situations.
Alongside this, governance and administration are ongoing responsibilities. Pension plans must pay members and beneficiaries their pensions promised. Plans also need to comply with emerging regulation in each country.
The effort required for governance and administration is often underestimated. However, we are seeing innovative risk management opportunities developed to meet these challenges. Insurance-based annuity products in the US and UK are evolving and giving opportunity, at a price, to remove defined benefit headaches.
Meanwhile, Pure DC is coming on stream in Germany and Switzerland. Countries where this was previously unavailable. Spain and Japan are also developing products to pass pension liabilities to third parties.
The defined benefit investment environment is also shifting. With higher interest and long bond rates, some plan sponsors are questioning whether highly matched strategies remain appropriate. All the more when considering higher long-term inflation and demands from members for benefit indexation and, in turn, the need for more substantial returns on assets.
An effective risk measurement and decision-making process cascading from headquarters to global operations will enable you to decide the appropriate actions to take and in which order, and indeed, what not to do. This will help to reduce likelihood of problems occurring in the future and to keep governance burdens at tolerable levels. This will allow you to shift your time focus from pensions to your core business.