Five key pension challenges |
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| Governance | |
| Written by Roberta Murray | |
| Friday, 13 November 2009 | |
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Advice ahead of an unpredictable 2010 for corporate pension schemes.
Mercer have highlighted five key challenges facing corporate employee benefit schemes in 2010 against a background of patchy economic recovery and a rapidly aging workforce. “Employers are being faced with unprecedented challenges due to the economic environment. We have identified five of these challenges as part of our annual Compensation and Benefit Plans around the World guides for multinationals.” 1. Balancing the response to the recession with long-term positioningCompanies have relied on tried and tested cost control tactics to weather the recession, including reducing contributions to DC plans and stopping accruals in DB plans. Many companies are also introducing strategic innovations to benefit programs to help with cost control in the longer term. Instances include adding Wellness programs and allowing employees to tailor their own benefit packages through the implementation of flexible benefit programs. Companies are also assessing whether the level of certain benefits provided can be linked to profitability, such as introducing a profit-sharing component into DC plans. Unsurprisingly, job security has supplanted the impact on retirement plan investments as employees’ primary concern. Employees are ready to become part of the solution, at least in the short term, to ensure the viability of the company. “The recession has raised the profile of retirement, health and risk benefit programs among employees and the issues that they’re facing,” commented Mr Newman. “Companies will need to take this into account as they formulate reward strategies for the recovery and beyond”. 2. Shifting from defined benefit (DB) to defined contribution (DC)The trend from DB to DC will continue. This shift has generally been accompanied by a trend to lower employer-provided retirement benefits. In many countries, market-average DC plans provide significantly less retirement income than market-average DB plans. The recent financial turmoil has highlighted some of the pitfalls of providing lower retirement benefits through a DC plan. According to Mr Newman, “Many companies have in response increased their focus on DC plan management, often on a global basis. The emphasis is to ensure cost efficiency, and that employees are empowered to make good decisions relating to retirement. This often includes financial education.” 3. Understanding the cost and risk driversNumerous companies are intensifying efforts to develop a clear understanding of the cost and risk drivers embedded in retirement and benefit programs to ensure they can adopt targeted solutions to control these factors. Tactics being considered include encouraging behavioural change through a global health management programs or adjusting investment strategies to neutralize certain uncompensated risks being carried in retirement plans. 4. Improving global benefits governanceThe increased visibility of retirement and health benefit programs to a wide range of stakeholders from employee to board members has encouraged a trend toward increased global oversight. Management of financial risk and volatility and the related reputational issues requires a more structured approach than many organisations may have needed in the past. “As multinational companies often have fewer resources available on the ground to manage these programs locally - and at head office to oversee them centrally - having a robust global governance framework is vital,” commented Vicki Stokoe, Mercer’s global governance consulting leader. This framework includes both the structure and the supporting processes needed to achieve the desired level of central oversight and frequently includes written policies on design, funding and investment, clear delegation of authority and assignment of responsibility related to benefit programs, and a defined approach to monitoring and mitigating risks. A recent global DC study conducted by Mercer revealed that fewer than two-third of respondents have formal, documented DC plan governance policies. 5. Reacting to changes in government policyIn the short term, reform is being contemplated in public healthcare policy in countries such as the US, China and Germany. Employers can expect that such reform will have a significant effect on the programs they provide. A number of public policy changes have been enacted to help companies respond to the recession and the decline in capital markets. Minimum funding standards for retirement plans have been relaxed in several countries even as increased disclosure to participants is now required. Companies should be examining the implications of these changes on funding strategy in the short to medium term. “Longer term, it’s likely that governments will continue to shift cost from the public sector to the private sector as they grapple with the impact of ageing societies,” commented Newman.
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