Corporate DB plans get ‘wake-up call’ on investment risk

Struggling financial markets worldwide are giving companies with defined benefit pension plans a “wake-up call” on minimizing global investment risk, according to a Mercer survey that showed 77% of companies plan changes to better manage that risk.

Of 114 companies surveyed between October 2009 and January 2010, 16% of multinational organizations said they believe their governance structures are sufficient for meeting anticipated needs, but 30% are planning changes to their reporting structures.

“For many multinational organizations, the financial crisis in major markets and the impact on benefit programs were unanticipated, and they paid insufficient attention to risk-management activities, such as scenario planning and extreme-event modeling,” Vicki Stokoe, global governance consulting leader at Mercer, said in a news release. “To make matters worse, companies lacking ready access to key information or without an established decision-making structure struggled to respond quickly and effectively.”

The survey also showed:

• 93% of respondents said DB plans pose a potential risk to the company’s business strategy;

• 81% said the plans pose a financial risk;

• 93% said the plans are a source of risk to the company’s reputation; and

• 60% need more information about risk exposure.

“Most organizations focus on plan design and funding decisions, but few devote the same attention to investment policy and monitoring,” Ms. Stokoe said in the release. “An integrated approach is needed to effectively manage risk. Equally, for organizations with DC retirement plans and non-retirement benefit plans, operational and communication risks require active management. Current policy and oversight suggest that these risks are not yet fully appreciated — to the detriment of work-force planning and employee relations.”

Ms. Stokoe could not immediately be reached for further comment.