Relief From Rising Pension Risks

Market volatility and a complex compliance environment make it increasingly difficult for companies to mitigate fiduciary risk in their pension plans, but a well-considered action plan can lighten the burden.

Pension plans represent a sizeable pool of assets and liabilities for most large organizations. Although plan terminations and conversions have consistently diminished the number of active plans for the past two decades, 71 percent of the S&P 500 still offer pensions, according to the Corporate Executive Board. "The sheer magnitude of these plans exposes the sponsor to a number of important risks," notes Dave Chittim, senior vice president, investment, Mellon Pension Services, in Pittsburgh.

Changes under consideration in the U.S. Congress and the FASB's proposed rules for pension expense reporting add to the list of sponsors' concerns. The FASB's March 31, 2006, exposure draft requires that employers fully recognize the plan's funded status on the balance sheet, effective for fiscal years ending after Dec. 15, 2006.

A number of companies are freezing their plans to slow the growth of liabilities, but this does little to alleviate market and mortality risks. Other options include terminating the plan by purchasing annuities -- an expensive solution -- or changing the portfolio to include a larger portion of assets in potentially high-return vehicles such as hedge funds and property investments. Companies can also attempt to transfer some fiduciary risk by outsourcing investment management.