However, the Majority Indicate They Would Consider Alternatives if Market Conditions, Regulatory Environment Worsen
STAMFORD, CT, July 9, 2009 – While the financial crisis has negatively affected the financial health of most defined benefit (DB) plans, most executives of U.S. firms with DB plans remain committed to the financial viability of their plans, according to the third CFO Research Services study conducted in conjunction with professional services firm Towers Perrin.
However, more than 70% of senior finance executives from U.S. companies indicate that recessionary pressures are “causing a long-term shift in how companies and workers prepare for retirement.” In addition, 40% of U.S. respondents said they would be “very likely” to reconsider their long-term commitment to their DB plans if pension accounting rules made income statements more volatile.
“There is no doubt that the current financial crisis has significantly hurt the financial health of most DB plans,” said Sylvia Pozezanac, Managing Principal of Towers Perrin’s Retirement Risk Solutions business practice. “However, while cash and credit are generally scarce, the overwhelming majority of companies – more than 80% – say they are confident that they will have the cash to meet plan funding requirements. Companies are telling us that they are committing to returning their plans to a better funding status for the longer-term, but their ongoing commitment to the plans rests on economic recovery and reasonable regulations.”
More than 71% of respondents indicate that they currently plan to pursue the long-term viability of their DB plans rather than seek alternatives to DB plan sponsorship. Of those committed to sticking with their DB plans, more than 76% say they are shifting their DB strategy to focus more on reducing risk than on seeking additional investment returns.
Furthermore, survey respondents who remain committed to DB plans are much more likely to be using structured investment products, such as derivatives, futures and inflation swaps, to better manage their exposure to interest rate risk or to increase investment returns. According to survey data, pensions that have used financial instruments to manage risk have suffered less during the economic downturn.
Interestingly, while most DB plans have been hurt financially, one in five executives say their plans have actually fared well despite the current financial crisis.
“What’s most noteworthy is that the vast majority of companies with plans that have done well use financial instruments such as swaps, futures, forwards and options to manage risk in their DB plans,” said Sam Knox, Vice President and Director of Research, CFO Research Services. “Conversely, those respondents whose plans were hardest hit by recent economic events – and who are now considering DB alternatives – are less likely to have used synthetic instruments.”
Finally, senior financial executives report that the portion of their pension portfolios devoted to equities is significantly lower today than it has been historically, and most don’t expect to see equities return to their pre-recession levels. Alternative investments remain popular, however, with 73% of executives noting they have some private equity investments. The rate is highest for the largest organizations and for those who express a long-term commitment to DB plan viability.
“As plan sponsors look forward, they will have to balance their near-term and long-term objectives with their appetite for risk,” said Mike Archer, Towers Perrin Principal and Chief Actuary. “They should consider how their pension plans will perform under a broad range of potential economic and capital market conditions, and how that performance correlates with — or deviates from — overall company performance. Many will recognize that this holistic approach leads to a dynamic strategy that produces optimal financial results.”
About the Survey
The third annual “CFO Pension Risk Survey” was developed by Towers Perrin and CFO Research in an effort to understand the effects of the economic downturn on companies’ DB plans. The research program focused on plan funding policies, investment strategies and risk management and plan alternatives. The study included 439 senior finance executive responses from large U.S., U.K. and Canadian organizations across all industries as well as an extensive interview program with senior finance executives. The online survey was conducted during April and May 2009.
About CFO Research Services
CFO Research Services is the sponsored research group within CFO Publishing Corporation, which produces CFO magazine, CFO.com and CFO Conferences. CFO Publishing is part of The Economist Group. More information about CFO Publishing is available at www.cfo.com.
About Towers Perrin
Towers Perrin is a global professional services firm that helps organizations improve performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, insurance and reinsurance intermediary services, and actuarial consulting. Towers Perrin has offices and alliance partners in the United States, Canada, Europe, Asia, Latin America, the Middle East, South Africa, Australia and New Zealand. More information about Towers Perrin is available at www.towersperrin.com.
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