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How can you manage pension and benefit plans to minimize risks?

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Pension and benefit plans are a major part of employee compensation and retention, but they also pose significant financial risks for employers. If you are responsible for managing pension and benefit plans, you need to be aware of the potential sources of risk and how to mitigate them. In this article, we will discuss some of the key aspects of pension and benefit plan risk management, such as:

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1 Plan design

The design of your pension and benefit plans can have a big impact on your risk exposure and cost. You should consider factors such as eligibility, vesting, contribution rates, benefit formulas, inflation adjustments, and portability. For example, you may want to avoid offering defined benefit plans that promise a fixed amount of retirement income regardless of investment performance, as they can create large liabilities and funding gaps. Instead, you may opt for defined contribution plans that shift the investment risk to the employees and allow you to control your expenses.

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Natalia Protsenko

Founder @Stratagema | Strategic B2B Marketing
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Benchmarking: Regularly compare your compensation packages against industry standards to stay competitive. Flexibility: Offer a range of benefits to suit diverse employee needs, like flexible working hours, health care options, and retirement benefits. Performance Link: Align part of the compensation to performance metrics, balancing fixed costs with variable bonuses based on clear targets. Clear Communication: Ensure that employees understand the value of their total compensation, including non-monetary benefits. Legal Compliance: Stay updated with legislation to avoid penalties and ensure that benefits are compliant with tax laws. Scalability: Design compensation structures that are scalable and sustainable as the company grows.

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Zakari Ahmadu, MBA, CIFE?

Head Business Development at One17 Capital Limited
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Pension programs must be designed with fund investment performance factored in. It should determine risk exposure levels for different categories of participants based on age to retirement, because the younger you are the more your risk appetite, while the closet you are to retirement the less your pensions funds should be exposure to high risk investments. Investment vehicles must also be clearly spelt out and the maximum investible amount be clearly defined. Credit ratings of financial institutions where funds will be placed should also defined. Lastly, there should be a separation of Pension fund administrators and custodian under the strict supervision of a regulatory agency.

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Pradeep Pandey

Man From Motilal Oswal , Partner, Vice President
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The contribution from employer has to be merit based considering the impact of employee on the organisational growth and health in the terms of contribution given. It should be linked to profits of the organisation in a certain manner & significant enough to retain and give a impactful financial freedom to employees.

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2 Funding strategy

Another important aspect of pension and benefit plan risk management is your funding strategy. This refers to how you set aside money to pay for the future benefits of your employees. You should have a clear and consistent policy for determining your funding level, contribution rate, and asset allocation. You should also monitor your plan's funded status regularly and adjust your strategy accordingly. For example, you may want to increase your contributions or reduce your benefits if your plan is underfunded, or invest in more conservative assets if your plan is overfunded.

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Robert Massa, ChFC, CEBS, AIF, CPFA, CHSA, NQPC

2023 Retirement Adviser of the Year!: Solving retirement for employers and employees across America, #401kguru, #theretirepro, #The4a(k)le
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It's critical that your pension funding strategy should be based on the terminal funded status of your plan. Your Adjusted Funding Target Attainment Percentage (AFTAP) may indicate that you are above 80% funded and may not be required to make any contributions in the current plan year. However, the AFTAP is unrelated to whether or not you are on track to have a fully funded plan. Instead, you should be tracking your actual funded status and have an investment glidepath strategy that stipulates the asset allocation of your plan assets at various funded percentage levels which enables you to de-risk the portfolio as you get closer to fully funded. If you're looking to terminate the plan, you should target being 108% - 115% funded.

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3 Governance and compliance

Pension and benefit plans are subject to various legal and regulatory requirements that you need to comply with. These include accounting standards, tax rules, fiduciary duties, disclosure obligations, and reporting guidelines. You should have a robust governance structure and process for overseeing your plan's administration, performance, and compliance. You should also seek professional advice and guidance from experts such as actuaries, auditors, lawyers, and consultants. Failing to comply with the rules can result in penalties, lawsuits, and reputational damage.

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4 Risk transfer

One way to reduce your pension and benefit plan risk is to transfer some or all of it to a third party. This can be done through various methods, such as buying annuities, outsourcing administration, or offering lump-sum payments. Risk transfer can help you eliminate or lower your liabilities, costs, and volatility. However, it also comes with some trade-offs, such as fees, taxes, and loss of control. You should weigh the pros and cons of each option and evaluate the impact on your plan's objectives and stakeholders.

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Robert Massa, ChFC, CEBS, AIF, CPFA, CHSA, NQPC

2023 Retirement Adviser of the Year!: Solving retirement for employers and employees across America, #401kguru, #theretirepro, #The4a(k)le
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It's important to remember that the cost of risk transfer to an insurance company comes at a premium to being fully funded inside the plan. Insurance companies that assume your pension liabilities due so at a different assumed level of risk and with different mortality assumptions than your plan actuary. They also need to factor in a profit margin for the annuity contracts they will issue that will assume your current and future pension benefit liabilities. That's why you should target your fully funded status at anywhere from 110% - 115% of your current projected liabilities as I mentioned above.

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5 Communication and education

Finally, an essential part of pension and benefit plan risk management is communication and education. You should communicate clearly and transparently with your employees, plan members, and other stakeholders about your plan's features, risks, and performance. You should also educate them about their rights, responsibilities, and options. Communication and education can help you build trust, engagement, and loyalty among your employees and plan members. It can also help you avoid misunderstandings, disputes, and complaints.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you manage pension and benefit plans to minimize risks?

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3

4

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1 Plan design

2 Funding strategy

3 Governance and compliance

4 Risk transfer

5 Communication and education

6 Here’s what else to consider

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