The approach of many corporate pension funds focusing on increasing investment return rather than managing funding risk “is largely obsolete,” according to a report released Wednesday by accounting and consulting firm Deloitte.
With “pension deficits at near record highs for the largest 100 U.S. public company funds – $498 billion – and market uncertainty almost a norm,” along with regulatory funding and accounting issues, risk management strategies have come to the center of attention, according to the report, “CFO Insights De-risking pensions: Can it be done?”
“Given the interest of insurance companies and other financial institutions in tapping into the billions of dollars of corporate pension assets, there may be some advantages to being an early adopter of … emerging approaches (in derisking) despite the current interest rate environment,” the Deloitte report said.
The approaches include annuity buy-out and annuity buy-in strategies. Annuity buy-outs include the recent General Motors Corp. purchase of a group annuity from Prudential Insurance Company of America, transferring some $29 billion in pension obligations to the insurer. In a buy-in, the pension plan “invests in annuity contracts, offering a hedge against future risks,” the report said.
Other strategies include investment outsourcing (such as retaining an outside adviser who takes co-fiduciary responsibility for investment decisions), liability-driven investing and derivative overlays.