Interest rates are the most important risk facing defined benefit plan sponsors in the U.S., Canada and the U.K. over the next three years, according to an Aon Consulting global survey on pension risk management released today.
Top risks cited by respondents were interest rates, 58%; longevity, 21%; equity markets, 15% and inflation, 6%, a report about the survey said.
Respondents said the areas of risk management that will account for the greatest increase in demand from defined benefit plans over the next three years are interest rates, cited by 58%; equity markets and inflation, 44% each; longevity, 37%; liquidity, 15%; credit, 5%; and currency, 2%, said the 72-page Aon report. Respondents could choose up to three risks.
“We will likely see new products introduced with leverage underlying the product, said the report, titled 2010 Pension Risk Management Survey. “However, the pace of uptake for these products will likely vary due to the (aftermath effects of the) 2008 liquidity and leverage crisis.
“We expect that pension risk management will continue to face challenges in all three markets as a result of a lack of understanding by plan sponsors, trustees and pension consultants; DB plan governance structures that do not support rapid implementation of new strategies; (and) current weak funded positions that force some plan sponsors to take risk in order to improve their plan's funded position.”
The Aon survey, conducted in the last quarter of 2009, received responses from professional representatives of 41 investment management firms, mutual funds, investment banks, insurance companies and reinsurance companies in the three markets.