US/UK - UK and US defined benefit plans agree measuring liabilities is the most pressing risk factor affecting schemes, but they take drastically different views on most other risk factors, a new study shows.
Comparing Pension Risk Attitudes and Aptitude released today by MetLife asked plan sponsors in both countries to rank 18 different risk factors. In both cases the measurement of technical provisions and liability measurement topped the ranks. Funding deficits also ranked among the top five for both, while quality of member data ranked low.
But in some cases, the ranking highlights the different approaches to risk management taken by schemes in both countries. The difference comes down, at least in part, to structural differences in the markets.
For example, in the UK, longevity risk tied for second place with employer covenant, while US plan sponsors ranked longevity risk as tenth.
"While both countries are grappling with the challenges posed by increased longevity, the effect is more significant and the awareness more advanced in the UK. This is probably the result of the UK's more common inflation adjusted pension structure, as the cost of indexed pensions is much more susceptible to changes in life expectancy than a fixed nominal pension," the MetLife report says.
Rounding out the top five risk factors in the UK is investment management style - ranked 16 in the US.
US plan sponsors, meanwhile, have moved the importance of liability management up the ranks. In the 2009 version of the survey, plan sponsors ranked asset allocation as the most important risk factor, but that has dropped to fourth (it ranks sixteenth among UK schemes).
"In the US, although asset allocation still ranks high in importance, it's actually down from the top spot in importance when compared to 2009. This may be a by product of plan sponsors realising that more attention needs to be paid to the liability side of the pension risk management equation, and less to the asset side of the equation," the report says.
US plans ranked plan governance as the third most important risk factor; twelfth among UK schemes. Finally, advisor risk ranked fifth in the US, while in the UK it ranked thirteenth.
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