Too Many Worries or Too Few for Pension Fund Sponsors

“Risk importance concentration” is a measure of the extent to which pension plan sponsors concentrate on a narrow range of risk items, rather than paying equal heed to every potential worry. A new study by MetLife, a global provider of annuities, employee benefits plans, and insurance, raises by implication the question whether an increase in concentration is, under present circumstances, good or bad. After all, it is the fox you aren’t watching that is stealing your hens.

We’ll get back to that. For now, let us note that the report, issued in partnership with Bdellium and Greenwich Associates.

One of the purposes of the report is promulgation of an index that measures “the extent to which plan sponsors are managing the risks they believe are most important,” and a corresponding analysis.

The index, known formally as the U.S. Pension Risk Behavior Index (U.S. PRBI), creates an average success rating for each respondent, incorporating self-reported success at the management of each of 18 risks. The success rating weighs these risks according to their importance – again, as reported by the respondent.

It then turns this data into an average success rating across all respondents. The 2012 result is 85 (on a scale of 100). This is the highest rating in the four years of the scale’s existence. It was 82 in 2009, fell to 79 in 2010, and rose to 81 in 2011. The 2012 result, then, is its second consecutive rise.  MetLife takes this as a justification for “cautious optimism that plan sponsors are developing some commitment to a new course of risk management.”


The top four risks in order of importance are: underfunding of liabilities; asset & liability mismatch; asset allocation; meeting return goals. These are the same four goals that were top rated last year. “The year-over-year consistency in the top four risk factors … is not entirely surprising” the study authors say. The consultancy and actuarial firm Milliman lowered the average discount rate from 4.53 percent in November to 4.25 percent in December 2011.

MetLife says, “Improvement in funded status continues to lag behind increased awareness and understanding of risks” so sponsors naturally list as their top worries those relative to funded ratio volatility.

One of the goals of the index is to get at “risk importance concentration” as noted above. If a sponsor is focusing intensely on just one type of risk, the concentration figure is 100: if a sponsor spreads its worries equally among all 18 risks, the figure is zero.

In 2009, the risk importance concentration was 30 percent. Now, in 2012, it is 40 percent. The increase is evidence, according to MetLife, that “plan sponsors are differentiating among the 18 risk factors to a large degree and concentrating on the core set of risks that they believe can have the greatest impact on their plans.”

MetLife also seems to believe that this increase in concentration is a good thing. Why worry about peripheral matters? Why not focus on the core?

There is another way of reading the data, though. Perhaps the increase is a problem. The risk of inappropriate trading was ranked last (18th) in the 2012 survey. This has taken quite a tumble: it was ranked respectably high in 2010, when it was the 7th most urgent concern on the minds of sponsors. Has that risk become less of a danger? Perhaps there has only been a bit of a decrease in the prominence of rogue-trader headlines.

What about the risk that workers will take earlier retirements than managers/sponsors estimate, paying into the system for fewer years and receiving its payments for more? This doesn’t seem to bother sponsors either. It ranks 16th. MetLife observes that “aging Baby Boomers” are in fact working longer than some had expected.

Qualitative Interviews

Beyond the number crunching, this study also included “qualitative interviews” with sponsors. One of the themes that emerged from these interviews was the need for a more dynamic approach to portfolio construction than had been customary, both to get the necessary return and to de-risk long term.

Bookkeeping changes, such as calls for mark-to-market accounting, are much on the minds of the interviewees, too. One said, “We are much more cognizant of the balance sheet and income statement impact of fluctuations in plan assets and liabilities” than formerly.

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