USA och pensionskrisen – AON

For corporate defined benefit plans in the United States, the calamitous decade since the collapse of the tech stock bubble in 2000 marked a turning point. In 2010, large corporate plans are commonly closed to new entrants and many of those are completely frozen—committed to paying only those benefits earned by employees in past years. A decade of declining interest rates and low, single-digit equity returns finds most pension plans reporting sizable deficits. In many cases, their sponsors acknowledge that these deficits won’t go away on their own—large cash contributions will be required to fill them.

Given the current picture, it would be easy to miss the transformation that is occurring. Our 2011 Aon Hewitt US Pension Risk Survey finds this transformation taking place in the attitudes, strategies, and governance practices of plan sponsors. This transformation is taking place at plans large and small, underfunded and well funded, open, closed, and frozen. In our view, this represents one of the most important shifts in pension plan investment management practices since the 1980s.

For corporate defined benefit plans in the United States, the calamitous decade since the collapse of the tech stock bubble in 2000 marked a turning point. In 2010, large corporate plans are commonly closed to new entrants and many of those are completely frozen—committed to paying only those benefits earned by employees in past years. A decade of declining interest rates and low, single-digit equity returns finds most pension plans reporting sizable deficits. In many cases, their sponsors acknowledge that these deficits won’t go away on their own—large cash contributions will be required to fill them.

While it’s tempting to condense this shift to a single word or phrase, our survey finds that it has several dimensions: – Investment policy, rather than plan design, has become the primary risk management tool for plan sponsors. Traditional asset-based performance benchmarks are ceding top billing to liability benchmarks. With the shift to liability-based benchmarks, there is greater awareness of the liability-hedging characteristics of various asset classes and instruments.

– Static investment policies are giving way to dynamic policies that explicitly incorporate plan-specific objectives such as funded status to optimize, rather than minimize, plan risks. Looking back on our prior surveys, we see the speed with which this transformation has occurred:

Our first Global Pension Risk Survey was performed in early 2008, just prior to the Great Recession and the worldwide stock market crash. Sponsors’ attention was absorbed in implementing the provisions of the Pension Protection Act, unaware of the tsunami that was to come.

The 2008 survey tallied a few sponsors adopting leading-edge risk management practices in what turned out to be the nick of time. Our second Global Pension Risk Survey was taken in late 2009, as sponsors struggled to repair the crash’s damage amid a creeping recovery. Funding levels had partially recovered from their March 2009 lows, but deficits still loomed large, driving cash and accounting budget projections to actionable levels. If 2008’s theme was a fatal lack of urgency, 2009’s theme was very different: “Everything is on the table.”

Our third survey was performed in late 2010 and early 2011, and while funding levels continued to creep up from dangerously low levels, we saw sponsor attitudes had changed enormously from 2008. Confusion and anxiety have faded somewhat, and we find that most sponsors have made substantial changes in the management of their retirement programs: — We see strong momentum in de-risking strategies, mostly at the expense of exposure to domestic equities. While many flavors of de-risking are popular now, LDI, the 2009 favorite, has been surpassed by 2009’s dark horse: dynamic investment policies. Global Pension Risk Survey 2011 US Survey Findings — Plan closings and freezes continue, but a large percentage of US plans continue to accrue benefits for at least some portion of the employee population. And while the majority of surveyed plans are closed to new entrants, most sponsors that were contemplating full plan freezes in 2009 chose not to do so. For now, it seems, the plan freeze decision has been asked and answered, and for about half of the survey respondents the answer was “No” or, at least, “Not now.”

Overall, survey results show a greater awareness of pension risk, an understanding of the capabilities and limits of the available risk management tools, and an acceptance that achieving a manageable level of risk takes time, planning, and patience—but that it can be done, after all.

The 2011 study found the persistence of old trends amid the emergence of new ones: – The largest shift from last year was the rise in acceptance and adoption of dynamic investment policies. This shift was in evidence in many of the responses to the survey questions, and in our view it represents the most important finding from this latest survey. – Asset allocation changes during 2010 saw the continuation of 2009’s strongest trend: sponsors sold domestic equities and bought long-duration bonds, primarily credit bonds. – There was renewed interest in expanding allocations to alternatives, and to a lesser extent global equities. De-risking wasn’t just about extending bond duration in 2010—diversification of the return-seeking portfolio was just as important. – Major plan design changes, such as closing the plan to new entrants or freezing benefit accruals, seem to have tailed off. – There was continued strong interest in delegation of the entire investment process, or portions of it, to outside vendors. This suggests rising awareness of the added resources needed to implement risk-controlled strategies such as dynamic investment policies, as well as an urgent sense that missed opportunities can be costly. – There was a decline in interest in risk-transfer solutions such as annuity purchase, either as a plan investment (“buy-in”) or as a plan settlement (“buy-out”). This is confirmed by the current low level of activity in these areas, in particular the failure of any real “buy-in” activity to emerge in the US. – Funding policies have changed little over the year. Roughly 37% contribute the minimum required plus amounts necessary to avoid benefit restrictions, while half that number contribute just the minimum. – After years of turmoil, a new level of clarity seems to be emerging. Sponsors are shifting their risk mitigation efforts away from benefit design, funding policy, and even actuarial smoothing techniques, and focusing them where they can have the greatest impact—on investment strategy.

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