Leveraging Data to Manage Risk

By Keith McDonagh

Now more than ever, the ability to leverage data to uncover risks and identify opportunities can be the difference between a firm’s success and failure. In our increasingly digital world, data is no longer an intangible asset, it is an essential element of business strategy and enterprise management.

In pension and benefit administration, advanced data management and analytics are invaluable tools when managing the pension assets and liabilities and the impact on the employer’s bottom line. The data can provide key insights that help executives, together with their expert financial consultants, to identify risk management needs and solutions. Particularly in this period of heightened market volatility, it is essential for CFOs to quickly and precisely assess the costs and risks of a company’s retirement plans as well as the impact to their financial statements.

The Value of Data Management in a dynamic market

Quality data management and robust reporting capabilities are instrumental when it comes to actuarial forecasting, investment oversight and compliance reporting. At the core of any benefit plan is its participant data, which provides a sound basis for plan administration. Having plan asset and participant data in good order and readily accessible is essential in dynamic environments. Executives and their benefits consultants rely on such efficiencies to determine plan assets and liabilities, and the respective impacts on the company’s balance sheet. This is a particularly important issue as plan sponsors increasingly evaluate liability driven investment (LDI) strategies and pension risk transfer (PRT) options.

For example, the current protracted period of declining rates has put significant stress on many retirement plan sponsors causing plan liabilities to increase. This condition has made keeping abreast of rate changes and the impact on plan liabilities especially critical. Accessing timely and accurate data on market returns and relevant interest rates is essential to this process. At the close of Q3 2020, year-to-date discount rates had fallen roughly 65 basis points. For a pension plan with a liability duration of 14, that translates to a 9% increase in liability.

Conversely, many plans’ funded statuses improved due to historic market performance that helped plan asset growth keep pace with increasing liabilities. Nonetheless, the overall political-social-and-economic environment remains volatile and market growth can easily evaporate as experienced just this past year. The Dow Jones Industrial Average (DJIA) plummeted in March to 18,591 from over 29,000 in late February, yet, in late December 2020, it surpassed an unprecedented 30,000. Such levels of exceptional volatility can cause unpredictable risk.

Equally as important as the current market performance are the analytics to understand the potential impact of changes in the economic environment including the regulatory landscape on retirement plans. To leverage its value, data is used to help measure risks today, and model future rate and return scenarios under varying economic conditions. The quality of such projections is essential to providing an informed foundation for the evaluation and adoption of de-risking strategies. In addition, employers can both bolster benefit packages for executives, while reducing tax costs through non-qualified plans funded with corporate owned life insurance.

Looking Toward the Future

The availability of data today offers businesses tremendous opportunities to make better informed decisions across the range of a company’s business operations. The leverage of data analysis in all aspects of enterprise financial management is important. As methods of data management and processing evolve, the quality of data needs to evolve as well. With accurate data and a skilled consultant, plan sponsors should be able to determine their liabilities and the paths available to deliver on benefits promised their employees.

Since 1861, MassMutual has stood by its customers through wars, depressions, recessions, market crashes and many other financial challenges. We’ve stood the test of time by applying our risk management capabilities and financial experience to help customers prepare for the worst and take advantage of opportunities. With this expertise, we help our customers manage the impact of retirement benefit costs and risks on their balance sheets with our corporate owned life insurance and pension risk transfer solutions. Together with your trusted advisor, please reach out to us to learn more about the solutions we offer.

^{©2020 Massachusetts Mutual Life Insurance Company (MassMutual®), Springfield, MA 01111-0001. All rights reserved.}

^RS-50494-00

This sponsored content was not written by the editors of the newspaper, Pensions & Investments, and does not represent the views of the publication, or its parent company, Crain Communications.