Pension Plans Under Closer Watch

By Karla L. Yeh, Reporter

By Karla L. Yeh, Reporter

Pension funds struggling with declining asset values could be hurt more by the consequences from losses than the losses themselves, said Susan Mangiero, president of Pension Governance Inc., on Tuesday.

“The real question is what actions are forced upon plan sponsors as a result of reported losses,” she added. “For some plan sponsors, the pension chain of events is significant.”

The Organization for Economic Co-operations and Development last week reported average pension fund returns plummeted by more than 20 percent between January and October, resulting in a $4 trillion loss in pension assets. In addition, consulting and actuarial firm Milliman on Monday said corporate pension funds could be $93 billion in debt by the end of the year after asset values dropped by $120 billion.

“A loss of $120 billion is hard to ignore, especially since many economists believe that market volatility is here to say, for a while at least,” Mangiero said.

To combat record losses, Mangiero said companies could be forced to contribute billions of dollars in cash or freeze their defined benefit plans if funding ratios drop below 60 percent, pursuant to the Pension Protection Act of 2006. They might also reduce benefits paid to retirees and face ratings downgrades or higher capital costs in an attempt to replenish the funds, she added.

As the New Year approaches, shareholders and plan participants will most likely watch their pension plan sponsors under a close lens to “better understand the nature of the reported losses,” said Mangiero.

In the meantime, plan sponsors will “try to figure out how they are going to recoup equity sector losses” and “may be tempted to allocate more monies to riskier investments,” Mangiero said. She added that asset allocation will be a top priority for pension plans that need to boost money management and risk management focuses.

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Posted on Nov. 18, 2008