Year after year, corporate DB plan sponsor surveys show controlling funded status volatility (surplus risk) as the top priority for their organizations. When liabilities grow faster than plan assets, additional cash contributions are required. At the same time, pension assets and liabilities have become prominent parts of company financial statements that investors use to evaluate company health. The need to accurately estimate financial risks presented by the pension continues to increase. Global market swings and low interest rates have greatly impacted the funded status of corporate defined benefit plans over the past decade. Particularly in the last year, wide swings in equity markets have become less predictable, and increased volatility has become more concerning.
In this piece, we look at the three main sources of funded status volatility, and explore what FTSE Russell can offer to help plan sponsors address each one.
The three main sources of US defined benefit plan funded status volatility are:
- unhedged exposures to interest rates
- credit spreads