The recent call for companies to give mid-year information on their pension scheme assets underlines the need to actively monitor and manage pension risks, says Mercer Human Resource Consulting.
In light of the fall in equity values, the US credit-ratings company, Standard & Poor’s, has requested asset valuations and asset allocation details as at 30 June 2002 for defined benefit schemes run by US companies.
US-owned UK organisations will therefore be affected. Companies rely heavily on a Standard & Poor’s rating to borrow money in the States.
Pension funding levels are likely to have fallen significantly since the end of 2001, when many companies will have last provided information for their annual reports.
Matthew Demwell, European Partner at Mercer, said: “The recent fall in equity values has put defined benefit schemes under increasing pressure. Companies need to take action to understand the rapidly changing risks involved.”
Mercer advocates that risk analysis should be conducted at regular intervals to evaluate how past and possible future movements, such as a further decline in equity values, will affect the balance sheet and reported profits. This information will enable decisions to be made, with pension scheme trustees, as to whether the existing investment policy represents an optimal balance of risk and return. Mercer also suggests companies should benchmark themselves to assess their relative risk position.
Mr Demwell said: “Companies will be able to better understand and manage their pension risks if they regularly monitor their funding position and assess the impact of future events. They can then communicate to the market how they are addressing these risks.”
Standard & Poor’s has asked for asset valuations and asset allocation details, and suggested that any further relevant information should be provided. Mercer highlights the need to look at the liabilities as well, in order to gain a full understanding of a company’s position.
Mr Demwell commented: “The UK market must surely take notice of these developments and UK companies can expect similar attention.”