As most plan sponsors have probably discovered by now, private sector defined benefit (DB) pension plans contain certain types of risks. Having seen two black swan investment events in the last decade, along with the accompaniment of record low interest rates, many plan sponsors have grown weary of them. With the inception of the rules of the Pension Protection Act of 2006 (PPA), where liabilities became more marked to market and asset smoothing was limited, pension volatility and thus pension risk management have come to the forefront. Almost every pension and investment advisor consulting with plan sponsors has mentioned the notion of pension de-risking in the last couple of years and with good reason.
However, it is also important to understand that pension risk management strategies have their own implied risks associated with them. Sometimes, the risk can be explicit in the form of an increased cost. Other times, the risk may not reveal itself until you get further down the road implementing a given strategy. This article examines a few of the risks of de-risking.
This article was first published in the Spring 2014 issue of the Actuarial Digest.