WHAT DOES RISK MEAN FOR SPONSORS OF DEFINED BENEFIT (DB) PENSION SCHEMES?
Many sponsors will have seen their DB schemes’ funding positions improve in recent years, as financial markets have delivered strong returns. However, macroeconomic indicators suggest that the global economy is entering the late stages of its current financial cycle. This phase is
characterised by high valuations, low yields, greater risks and unattractive investment positions says Maria Johannessen, Head of Corporate Consulting, Mercer UK
S
chemes may be in a better place right now, but there are many risks that could hamper their progress. Whether
they have a strong funding position, have made improvements but still have a way to go, or are still considerably underfunded, sponsors should focus on understanding the key risks that they need to address. Which risks need addressing and when will vary from scheme to scheme. At Mercer, we think it’s important
that
all decisions are taken with an Integrated Risk Management (IRM) strategy at the core. To reach this position, finance directors (FDs)
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must understand the risks their DB schemes are taking, and how these relate (or don’t relate) to risks within their businesses. As a starting point, FDs should recognise
that DB schemes add volatility to their company’s balance sheet and this will vary depending on where a scheme is on its funding journey. To ensure the most effective decisions are made, scheme volatility and risks need to be assessed in the context of the sponsor’s business and how this changes through different economic cycles. As the options to address risk vary depending on these factors, we are having
conversations with scheme sponsors about what risks they see as the most material to their business. By linking this to capital management and a defined strategy, we are helping sponsors to ensure the right solutions are in place, at the right time and ensuring that they are in a position to capture opportunities that present themselves.
Are the right decisions being made given the current landscape? This varies significantly, but in most cases, we feel decision making could be improved, whether this is speed of decision making or
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