Multinational sponsors of defined benefit retirement plans always have been exposed to a range of financial risks that can have a major impact on their companies' finances — from reported earnings to free cash flow, balance sheet volatility, credit rating and risk capital allocation. So why are multinationals now focusing on the development of a robust global retirement plan risk management strategy?
For one thing, recent experience has heightened the awareness of retirement plan risks. Globally, retirement plans were relatively well funded in 2007. Then came the global recession in 2008. To the extent that pre-recession funding levels will return any time soon, many multinational sponsors believe that a series of actions should be taken that will lock in the gains and potentially transfer the related liabilities off balance sheet.
Then there's the asymmetrical risk/reward trade-offs with frozen retirement plans that are becoming more acute over time. Indeed, now that many companies have reduced future retirement plan costs and risks by freezing their plans, the logical next step to remove asymmetrical risk exposure may be to try and derisk the plan investments and/or to remove the plans entirely from the company's balance sheet when possible, calling for careful monitoring of retirement plan risk.
And there are potential changes in accounting standards. Historically, these standards have kept companies from seeking to significantly reduce risk within the confines of retirement plans, mainly because of the potential of increased charges to earnings linked to derisking actions. But principal accounting standards are expected to converge and change in the near future in such a manner that companies will not be allowed to take direct credit in the P&L for holding risky assets.