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Funding deficits rank as highest risk for DB pension schemes

Continued market volatility and economic uncertainty is driving defined benefit (DB) pension scheme sponsors and trustees to focus more intensely on critical funding-related risks impacting their schemes, according to the MetLife Assurance 2011 UK Pension Risk Behaviour IndexSM (UK PRBI) released today.

The study asked 89 sponsor and trustee how each group viewed 18 investment, liability and business risks that affect their pension schemes, and assessed how well they believed they were managing those risks. The ranking of funding deficits as the most critical risk according to both groups of respondants is reflective of reactions to continued volatility within DB schemes. While the overall funding position of schemes may be improving, on an individual scheme basis, the lack of a consistent and sufficient funding level is not inspiring confidence among either of the two groups.

Dan DeKeizer, chief executive officer, MetLife Assurance Limited, said: "In the face of lingering market uncertainty and concerns over the future viability of their schemes, sponsors and trustees have started to recognise that a more integrated approach to pension risk prioritisation may be the most effective strategy for their common goal of protecting members’ benefits, in contrast to the separate and largely un-coordinated model identified in the 2010 UK PRBI findings.

"While it’s encouraging to see sponsors and trustees increasing communications about risk prioritisation, the open question for the future is whether or not risk mitigation activity will be similarly co-ordinated. Sponsors and trustees must continue to work together and coordinate their actions to ensure the most critical risks are given the time and attention they deserve."

Despite a fall in the importance rankings from second to fifth, the study emphasised that longevity risk continues to be a major concern for scheme sponsors and trustees alike, noting an increased Importance Selection Rate from 28% last year to 38% in 2011. Sponsors and trustees also collectively ranked longevity risk as the least successfully managed risk in both 2010 and 2011.

The full rankings by overall importance were:

1. Funding deficits
2. Employer covenant
3. Asset and liability mismatch
4. Meeting investment return targets
5. Longevity risk
6. Inflation risk
7. Measurement of technical provisions/liabilities
8. Mortality risk
9. Asset diversification
10. Scheme governance
11. Investment risk profiling
12. Quality of member data
13. Investment valuation
14. Decision process quality
15. Invesment management style
16. Adviser risk
17. Inappropriate trading
18. Litigation risk exposure

More details on the 2011 UK PRBI can be found here.