While experts say the financial crisis has hurt the financial health of most defined benefit (DB) pension plans, leaving cash and credit generally scarce,
“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," says Sylvia Pozezanac, managing principal of Towers Perrin's Retirement Risk Solutions business practice.
In fact, according to results from the firm’s the third-annual "CFO Pension Risk Survey," 80% of 439 senior finance executive responses from large U.S., UK and Canadian organizations across all industries are confident that they will have the cash to meet plan funding requirements.
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.
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.
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.
