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CCH® PENSION — 01/24/11

Companies look to reduce investment risk in DB plans, survey says

The financial risk implications of defined benefit (DB) plan sponsorship have become the primary pension concern for U.S. companies with large defined benefit plans. To address these issues, many companies are considering changes to investment strategy and plan design, both for today and in the future. These are the findings of a joint survey of financial executives conducted online by Towers Watson and Forbes Insights from September 8 to October 8, 2010.

The majority (56%) of survey respondents said that the impact of DB plans on cash flow tops their pension-related concerns reflecting the competition between funding DB plans and capital needs highlighted by the recent financial crisis. This is followed by concerns about DB plan impact on company income statements (47%) and balance sheets (41%). Four in ten respondents indicated that the financial crisis has increased employees' appreciation of the retirement security inherent in DB plans. Further, nearly two-thirds of U.S. companies said that they will focus their efforts more on reducing investment risk --rather than seeking higher returns for their DB plans --while only 14% asserted that they will place a greater concentration on increased returns. Nearly a quarter (23%) said they planned no changes.

"Clearly, the financial crisis has once again highlighted the importance of managing the risk in the pension plan," said Matt Herrmann, leader of Towers Watson's Retirement Risk Management group. "While the current funded status of many plans limits the actions sponsors can take today, there is a desire to establish a plan for action as their funded status improves. For active and frozen plans alike, having a mechanism to reduce risk as the plan gets better funded will be key, whether that be through settlement, investment strategy changes or some other means."

Majority of "open" plans to stay that way

More than half of the pension plans in the survey are "open" (accruing additional benefits for both current participants and new participants); 32% are closed to new hires, and 14% are frozen to all employees. Over the next five years, the majority of respondents expect their open plans to stay that way --for about half of them, sponsors expect no change in benefit provisions; 29% will modify the benefit formula to reduce cost or risk, and only 15% are looking to close or freeze the plan.

Survey findings also indicated that 71% of the closed DB plans are expected to continue benefit accruals over the next five years, and only one-fifth of frozen plans are actively seeking to terminate altogether. This indicates that risk management opportunities will be around for a significant period of time even if the plan is frozen or closed.

Source: Towers Watson press release, December 16, 2010.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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