Press Release: Pension plan sponsors focus on controlling risks

VALLEY FORGE, PA (February 24, 2011)--Pension plan sponsors appear more concerned about risk and plan costs than returns, and are managing risk by making changes to plan design and investment strategy, according to a new Vanguard survey.

"Given the current economic, market and regulatory landscapes, we expected that plan sponsors would be focusing more on risk," said Kimberly Stockton, an analyst in Vanguard Investment Strategy Group and author of Survey of Defined Benefit Plan Sponsors, 2010. "But surprisingly, sponsors' concern about risk is much greater than their concern about return. The focus on returns would likely have been much higher during the pre-pension-crisis years and a bull market."

Many previous pension plan surveys have tended to examine the status of large pension plans, whereas this survey looks primarily at mid-size plans with $100 million to $1 billion in assets, a market segment representing more than 3,600 plans and an estimated total $500 billion in assets. Here are the survey's key findings:

  • Eighty-five percent of respondents rated pension risk as "very" or "extremely" important. The importance of risk increased with a plan's asset size relative to company size. The two risk concerns most cited by plan sponsors were interest rate risk (cited by 85% of respondents) and uncertainty in the equity markets (nearly 80%).
  • A majority of respondents said they intended to "derisk" their plan by implementing liability-driven investing (LDI) strategies, increasing their portfolio's fixed income allocation and duration, and decreasing their equity allocation.
  • Perceptions of risk influence sponsors' decisions. Respondents who rated their plans as more risky were more likely to make changes to investment strategies to include LDI and dynamic asset allocation. They were also more likely to alter plan design, such as freezing or terminating the plan or making benefit changes.
  • Sponsors recognize that minimizing risks through asset management can help control the volatility of plan costs. For instance, 81% of respondents manage assets to control the impact on company financials and 72% change asset allocation based on funding level, a liability-driven approach to asset management that affects pension plan cost volatility. In contrast, only 56% were focused on meeting a return hurdle.
  • Compared with historical pension plan asset allocations, respondents' equity allocations have declined dramatically and bond allocations have increased to attempt to match assets to liabilities.
  • Over the past two decades, the number of open and active defined benefit plans has declined substantially. The survey results reflect this trend, with 40% of all plans in the survey already frozen or set to be frozen over the next several years. Still, a significant number of respondents (42%) expect to keep their plan open and active over the next few years. Most reported that they have kept the plan open because employees value the benefit; the next most-cited reason was a desire to provide a secure retirement for employees. Of the entire group with open and active plans, 33% of respondents expect to make changes at some point.
  • Eighty-nine percent of all respondents reported that their plans are underfunded. Mid-sized plans were the most underfunded, with 4 in 10 reporting funding status below 80%--generally the level at which a plan is considered "at risk" and thus subject to accelerated funding requirements.

Vanguard conducted the survey in the summer of 2010. Nearly 160 pension plan sponsors responded to the survey, primarily representing mid-sized plans. A majority (63%) of the respondents' plans were open and active at the time of the survey.

Pension plan sponsors and nonprofits ranked Vanguard third overall in brand loyalty in a recently released Cogent Research study of institutional asset manager loyalty. The inaugural Cogent Research survey was conducted among a representative sampling of 590 institutional investors with more than $20 million in investable assets.

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About Vanguard
Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world's largest investment management companies. Vanguard manages more than $1.6 trillion in U.S. mutual fund assets. Vanguard offers more than 170 index and actively managed funds to U.S. investors and more than 60 additional funds in non-U.S. markets. Vanguard provides recordkeeping and investment services to 3.5 million participants and 1,700 plan sponsors in over 2,500 defined contribution plans, and is a major provider of investment, advisory, and recordkeeping services to defined benefit plans.

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Cogent Research surveys are syndicated studies conducted independently by that organization. Vanguard neither commissions nor pays to be included in them. Cogent Research has conducted unrelated, custom market research for Vanguard in the past.

All Vanguard asset figures are as of January 31, 2011, unless otherwise noted.

Investments are subject to risk. Investments in bond funds are subject to interest rate, credit, and inflation risk. Diversification does not ensure a profit or protect against a loss in a declining market.


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