Pension funds looking to offload risk will parcel up their liabilities into “bite-sized chunks,” according to Mercer.
Mercer said pension funds will ensure that they can afford to take at least some risk off the table by parcelling up specific chunks of liabilities. The consultant said pension funds are using liability management exercises to do that, some of which will be affected and influenced by the U.K. government's decision on transferring to defined contribution from defined benefit plans, which is currently under a comment period.
“Liability management tactics, such as provision of flexible options for individuals in DB plans at retirement, are becoming more common in the U.K.,” said Frank Oldham, senior partner and global head of the defined benefit risk team at Mercer, in a news release.
Mr. Oldham said the situation is the same in the U.S. “There are now ways and means to offer cashouts to deferred pensioners, pensioners and even active members.” Ireland and Germany are also similar, he said.
In the Netherlands, however, “the focus is on risk sharing with more organizations moving to collective DC, while looking to derisk remaining legacy schemes.”
Mercer has launched a new website to help companies meet the derisking challenge and has outlined eight current derisking trends. They include a trend toward more active management of legacy liabilities; pension fund behavior moving toward that of insurers; and a move toward stronger governance.