Many plans sponsors today are exposed to more risks than ever before. The recent drop in the price of oil has prompted some of Mercer’s energy clients to consider these risks more strategically.
In the ever-complex world of defined benefit plans, the disconnect between actuarial and investment decisions has exposed many plan sponsors to additional risks for both the company and its committee members. These risks typically involve funded status volatility, increased costs and contributions, and individual fiduciary responsibility. Mercer believes that managing these risks will provide companies, both within and outside of the energy industry, with the opportunity to cut costs and avoid sudden unforeseen shocks.
How can organizations manage these risks?
Historically, plan sponsors have viewed pension liabilities and assets separately, attempting to maximize the plan’s return on investments without regard to corresponding liabilities. However, the key to managing volatility is to adopt strategies that address how both assets and liabilities react to market environments.
The recent trend of managing pension liabilities and assets together has shifted the focus from maximizing asset returns to the plan’s funded status — that is, the ratio of a plan’s assets to its liabilities — by incrementally improving the funded status and managing its volatility.
With this focus comes the opportunity to combine actuarial and investment services while delegating many routine and administrative investment decisions to a trusted partner. This approach enables organizations to realize cost savings, reduce risk, spend less internal time, use fewer resources, and employ best practice governance. In a recent Case Study, an organization bundled their actuarial services with a delegated investment strategy and in addition to the benefits as described above went from paying $10.6M annually to $8.0M annually in combined fees.