Market volatility leading companies to rely on finance for pension decision making
The financial crisis has led companies to shift pension responsibility to finance from human resources in an effort to manage the market volatility affecting defined benefit (DB) plans, said Toronto-based actuary, Kevin Tighe.
The number of executives and organizations that believe finance plays a greater role in pension management has more than doubled in the past five years to 65 per cent, according to a survey from Watson Wyatt. A total of 161 senior executives and 156 companies participated in the report.
“The financial crisis has caused these plans to create a huge burden on many companies, so now the volatility and the cost of these plans is much more apparent to the plan sponsors,” said Tighe, retirement practice leader at Watson Wyatt.
The shift has taken place largely because companies recognize the need for the training and experience those in finance possess, said Rick Robertson, associate professor at the Richard Ivey School of Business in London, Ont.
“People who work in finance are trained to worry about the total risk involved,” he said.
When pension plans were doing well, there was a period of time where people were worried primarily about the return, he said. Now, organizations have encountered a situation where assets have decreased and concerns that liabilities have also been hit are rising, he added.
“Companies are saying ‘we are financially exposed on the pension side’ and that exposure is larger than people maybe fully realized,” he said. “And who do you turn to when you’re worried about financial risk in your company? The CFO.”
The shift from HR to finance has added to the level of responsibility to company CFOs, said Robertson. In addition to the added concern in terms of overall financial risk, they must also carefully consider the effects on employees, he added. With a decreased role for HR, finance professionals must make sure time is taken to deal with the impacts on employee morale.
Not as much incentive for
DC plan sponsors
While most pension plans have felt the effects of market volatility, defined contribution (DC) plans haven’t seen much of a shift toward finance management, said Robertson.
Because the employees carry most of the financial risk, there isn’t as much incentive for CFOs to get involved, he said.
However, the problems caused by DC plan decreases present a new set of problems as employees see their investments drain away, he said.
“There maybe some concern about the morale of the employees if they start to worry about their retirement but I don’t think it’s going to be as big a concern for the CFO,” he said.
Long-term implications
A finance driven approach to DB pension plans may lead companies to make decisions “out of necessity” without considering the long-term human resources impacts on employee retention, recruiting, morale and motivation, said Tighe.
“It’s possible the decisions being made now are necessary, but in the long term, may or may not fit into a benefit (plan’s) philosophy,” he said.
Despite a shift in responsibility, companies are not yet making significant moves to alter the types of plans offered, said Tighe. Instead, organizations are “sitting back and watching what happens.”
While the shift may seem a reasonable response to pension losses, Tighe said he is not convinced it is necessary. Many of the companies he deals with assign equal roles to HR and finance, something he said is important to providing a balanced benefits plan.
“I think HR needs to remain at the table just because it is part of your benefits philosophy and the total rewards offered to employees,” he said. “HR has to get educated on all issues and be in the position where they can contribute and understand what the implications are of the pension plan and on how the company makes money.”
