Webinar
Get Strategic About Integrated Human Capital Management
Nov 25th, 2008
Conferences
Talent Management Magazine's Strategies 2009:
Innovation to Impact
February 23rd — 25th, 2009
The Ritz-Carlton, Laguna Niguel, Dana Point, California
PLEASE VISIT OUR SPONSORS
New York — Sept. 22
Economic turbulence, demands for increased financial disclosure, changes in financial reporting and increased pension funding requirements are combining to make defined benefit pension plan risks more obvious, and requiring more proactive management by plan sponsors.
Yet, an analysis of the funding policies of more than 250 defined benefit plans conducted by Mercer reveals that 27 percent fail to develop and then adhere to a formal, well-documented funding policy. Altogether, 51 percent of sponsors surveyed fund only the minimum amount required by law, either by default or intentionally.
“An effective pension funding policy helps an employer better manage the defined benefit pension plan’s financial risks, costs and returns, balancing a long-term view of funding and risk management with a blueprint for determining each year’s contribution,” said Bob Moreen, Mercer worldwide partner and global leader of Mercer's Financial Strategy Group.
“The funding policy provides a context for the tactical decisions that plan sponsors make and establishes certain objectives — for example, whether to reduce year-to-year contribution volatility, minimize unwanted outcomes on the balance sheet or target a formal pension plan termination. Plan sponsors that have effective funding policies have put their risks in context and understand the potential consequences of all financial markets.”
By raising the minimum funding level to 100 percent of a pension plan’s target liability (up from 90 percent under prior law), the Pension Protection Act of 2006 (PPA) highlighted the need for plans to have an articulated funding policy. ERISA, the 1974 law governing pensions, has always required a written funding policy that could be as simple as a statement of intent to fund the minimum required amount.
The PPA now requires that each plan sponsor must provide participants with a written “annual funding notice” that includes a description of the plan’s funding policy along with the funded ratio.
Nearly one-fourth (23 percent) of the plans surveyed by Mercer have implemented an explicit funding policy. Another 49 percent have an implicit funding policy, and 24 percent fund the minimum, while 25 percent fund some other amount (such as the fiscal year pension cost, an amount to cover accrued accounting liabilities (ABO) or an amount to cover the projected accounting liabilities (PBO) to extinguish any balance sheet unfunded obligation).
The remaining 27 percent are contributing the minimum as required by law but without benefit of an articulated policy.
“Plan sponsors should take a more strategic and proactive approach to pension funding,” said Moreen. “Contributing the minimum amount to a plan may well result in more volatile year-to-year contributions, particularly if sponsors want to avoid the funding levels that trigger various adverse consequences under the new law.
“The current financial environment is providing plan sponsors with their first real-time test of the consequences of adverse markets for minimum or trigger-avoiding contribution strategies. These turbulent economic conditions will underscore the need for stronger risk management, stress-testing of outcomes under a range of scenarios and adopting more proactive contribution and funding strategies.”
"We expect to see more formalized pension funding policies as employers see how volatile the minimum contribution is under the new funding rules,” said Mercer actuary and worldwide partner Elizabeth Dill.
“Another influence could be passage of the stalled technical corrections bill for the PPA, sitting with Congress, which would permit plan sponsors to use a modest smoothing technique to value the assets in the pension trust. Unfortunately, it appears that this bill will not be considered until some time in 2009."
The survey also found:
November 2008
Small Changes, Big Results
Small behavioral changes produce remarkable performance differences.
November 2008
See You at the Talent Review
The real value in talent reviews is the discussion and collaboration, not the ritualistic review of data.
October 2008
What to Do About Performance Troublemakers
Individually, novelty, complexity and abstractness are performance killers. Together, they are even more troublesome.
September 2008
Stop Wasting Money on Training
The cost of inadequate workplace performance is staggering, but training, while a logical solution, is not always the answer.
October 2008
The Employee Survey: What's in It For Me?
Having an established Respondent Bill of Rights that can be communicated during the recruitment process can help set the proper expectations.
October 2008
Why Most Managers Are Stuck
Successfully transitioning into the manager role is not dependent on improving management expertise, but rather on changing one’s focus.
October 2008
Team Effort Pays in Talent at London Business School
At London Business School, a third of all staff positions are filled by internal candidates, which is an indication the school has had success in developing and retaining its staff.
October 2008
Hewlett-Packard: Simple Talent Management in a Technical World
When it comes to talent management, Hewlett-Packard is all about business — business strategy, that is.