Many companies around the world have not taken adequate measures to guard against defined benefit (DB) pension risk, according to a new survey released by global human resources consulting firm Hewitt Associates.

Even in the face of weak economic conditions and poor market returns, most companies have taken only small and conservative steps to risk management, the survey reveals.

Hewitt says the issue is particularly pressing in Canada, which survey results indicate has the highest proportion of DB plans open to new entrants, as compared to companies from other countries responding to the survey.

Since the start of the credit crunch in the last quarter of 2007, pension plan assets on a global level have plummeted by US$4 trillion. Against this background, Hewitt conducted a survey of 171 plan sponsors in 12 countries in summer 2008 to determine their approaches and attitudes to managing pension risk.

“The current financial environment underscores the need for organizations to manage retirement risk in the same way they handle general business risk-by determining their risk tolerance and being vigilant,” says Rob Vandersanden, a senior pension consultant in Hewitt’s Calgary office. “We’re not advocating that companies eliminate risk entirely — that would minimize investment returns — but we do recommend that they understand the risk they’ve assumed and ensure it is appropriate for the return it is likely to generate.”

In terms of the factors that influence a company’s attitude towards managing pension risk, accounting issues dominate globally, principally in terms of the impact on the profit and loss statement.

Canadian organizations, due to differences in accounting standards between Canada and the rest of the world and our solvency funding regime, are more concerned with cash funding requirements.

The impact on a plan sponsor’s financial resources is so significant that organizations, particularly in Canada, are moving pensions out of the realm of human resources and under the management of their finance teams.

Survey results reveal that pension risk is still typically looked at in isolation, with nearly half of responses supporting this view. Around one in six respondents indicated that pension risk is considered in the context of their overall enterprise risk budget.

Over one half of participants use asset liability modeling to determine their pension risk. In addition, one third also look at numerical values for pension risk drawn from deterministic shocks (e.g., a 20% fall in equities) and another one third use a “Value at Risk” metric on a local or global basis.

One third of Canadian participants say they have no formal quantified measure of their pension risk.

The most typical risk monitoring pattern for Canadian organizations is a quarterly update on asset values (45% of respondents), but an annual update of liability values, and risk measures (45% of Canadian respondents) is also common. However, the frequency of risk monitoring may have increased in recent months with higher market volatility.

Despite the fact that companies may not have a good idea of their risk tolerance or a timely indication of their risk exposure, some are taking steps to minimize risk, primarily with respect to their investment portfolios, Hewitt says. They are moving away from conventional holdings of equities towards more liability matching solutions and alternative investments, such as real estate, hedge funds, commodities, private equity and infrastructure.

According to Hewitt, It is still early days for pension risk management in Canada. Nearly 40% of Canadian plans have no policy for dealing with their interest rate and inflation exposures, despite the fact that they rate interest rate risk as the biggest component of their overall risk budget. Consequently, Canadian plan sponsors do not appear to be fully prepared to act quickly when market conditions present themselves that could allow them to reduce risk, Hewitt says.