Towers Watson (ticker: TW, exchange: NYSE Archipelago Exchange (.N))
News Release -
Companies Looking to Reduce Risk in Defined Benefit Plans, According
to Towers Watson-ForbesInsights SurveyThe majority of open pension plans to stay that way
NEW YORK, Dec 16, 2010 (BUSINESS WIRE) --
Following the economic crisis, the financial risk implications of
defined benefit (DB) plan sponsorship have become the primary pension
concern for companies with large U.S. DB plans, according to a joint
survey of financial executives conducted by global professional
services company Towers Watson (NYSE, NASDAQ: TW) and ForbesInsights.
To address these issues, many companies are considering changes to
settlement options, as well as changes to investment strategy and plan
design, both for today and in the future.
The majority (56%) said that the impact of DB plans on cash flow tops
their pension-related concerns reflecting the competition between
funding DB plans and capital needs highlighted by the financial crisis.
This is followed by concerns about DB plan impact on company income
statements (47%) and balance sheets (41%). Forty percent also indicated
that the crisis has increased employees' appreciation of the retirement
security inherent in DB plans.
Further, nearly two-thirds of U.S. companies said that they will focus
their efforts more on reducing investment risk -- rather than seeking
higher returns for their DB plans -- while only 14% asserted that they
will place a greater concentration on increased returns. Twenty-three
percent said they planned no changes.
"Clearly, the financial crisis has once again highlighted the importance
of managing the risk in the pension plan," said Matt Herrmann, leader of
Towers Watson's Retirement Risk Management group. "While the current
funded status of many plans limits the actions sponsors can take today,
there is a desire to establish a plan for action as their funded status
improves. For active and frozen plans alike, having a mechanism to
reduce risk as the plan gets better funded will be key, whether that be
through settlement, investment strategy changes or some other means."
To address investment risk over the next five years, a better alignment
of plan assets and liabilities (e.g., liability driven investment) is
the most favored strategy, chosen by 66% of respondents. Respondents are
divided on the likelihood of using alternative risk strategies. Some
plan sponsors will likely perform a liability redesign (e.g., changes in
plan type or benefit formula), pursue long-term investment
opportunities, governance structure improvement or liability transfer
(e.g., pension buyouts).
"The strong, increasing interest in LDI, confirms to us that companies
are stating a clear preference for a better balance between risk
management and return generation," said Carl Hess, Towers Watson's
global head of investment. "There is already a high awareness of the
level of risk companies are running through their pension plans. Some
are using swaps, options and other derivatives to improve risk
management, and the research shows that this is likely to increase.
"Additionally, pension funds are continuing to improve their governance
structures, enabling them to implement more sophisticated investment
strategies and have an increasingly dynamic approach to investment,"
Turning to plan design, more than half of the pension plans in the
survey are open (accruing additional benefits for both current
participants and new participants); 32% are closed to new hires, and 14%
are frozen to all employees. Over the next five years, the majority of
respondents expect their open plans to stay that way -- for about half
of them, sponsors expect no change in benefit provisions; 29% will
modify the benefit formula to reduce cost or risk, and only 15% are
looking to close or freeze.
Survey findings also indicated that 71% of the closed DB plans are
expected to continue benefit accruals over the next five years, and only
one-fifth of frozen plans are actively seeking to terminate altogether.
This indicates that risk management opportunities will be around for a
significant period of time even if the plan is frozen or closed.
Among other key findings from the survey:
Four out of 10 large pension plans are significantly underfunded
(lower than 80%) on an accounting basis.
Some pension sponsors are managing their plan contributions more
tightly and are striving to achieve explicit funding targets.
Specifically, fewer sponsors today (7% of plans versus 13% before the
crisis) are contributing the maximum tax-deductible amount, and fewer
sponsors (20%, versus 25% before the crisis) aim to fully fund their
plans. Beyond those targets, more plans are choosing to make the
minimum required contributions (29%, versus 21% before the crisis).
While a majority of respondents use various financial instruments to
manage pension risk, no single instrument is used by a majority of
companies. For instance, slightly fewer than 40% of plan sponsors use
interest-rate swaps and futures, and about 30% use credit derivatives.
Further, a third of sponsors that currently use instruments such as
interest-rate swaps, futures and options strategies expect to increase
their use of these instruments over time.
Sponsors provided some detail on how they expect to adjust their DB
asset allocation. Sixty-two percent said private equity is currently
part of portfolio of the majority of plans, followed by real estate
and alpha-seeking strategies that use short selling or derivatives
(both at 43%) and private infrastructure (26%). Many respondents say
they plan to increase the use of these classes.
About the survey
Towers Watson, in collaboration with ForbesInsights, conducted
the online 2010 Survey on Pension Risk from September 8 to October 8,
2010. The survey received 304 responses from U.S. corporate executives,
including chief financial officers, vice presidents of finance and
controllers, among others. Respondent companies are in varied
industries; manufacturing has the highest representation (about 50
companies). The vast majority (87%) of them had revenue of over $1
billion in the recent fiscal year and 30% of them exceeded $10 billion.
Seventy-six percent of the companies had 5,000 or more employees. The
survey inquired about the single largest DB pension plan. Eighty-seven
percent of the plans had over $100 million in assets and 41% had assets
of over $1 billion. Additional information on the survey can be found
About Forbes Insights
Forbes Insights (www.forbes.com/forbesinsights)
is the strategic research practice of Forbes Media, publisher of Forbes
magazine and Forbes.com. Taking advantage of a proprietary database of
senior-level executives in the Forbes community, Forbes Insights'
research covers a wide range of vital business issues, including talent
management, technology, marketing, financial benchmarking, small
business, and more.
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global professional
services company that helps organizations improve performance through
effective people, risk and financial management. The company offers
solutions in the areas of employee benefits, talent management, rewards,
and risk and capital management. Towers Watson has 14,000 associates
around the world and is located on the web at www.towerswatson.com.
SOURCE: Towers Watson
Michael McNamara, +1-212-309-3669
Whitney Kuhn, +1-703-258-7648