1. Reduce pension risk and required contributions. Many pension sponsors have already made several key decisions regarding the methods used to calculate the funding of their plans, but now there is a one-time opportunity to make another election. They can adopt segmented rates and lower the 2010 minimum required contribution and reduce long-range pension risk.
2. Avoid surprise contributions. Changes to plan provisions or negotiated benefits may require an immediate cash outlay by the pension sponsor. Therefore, any impending changes should be carefully analyzed to determine their potential effect on the funding requirements and the possible benefit restrictions if contributions are not made in a timely way.
3. Educate fiduciaries about pension-plan risk. Many plan sponsors who thought they understood pension-plan risk have realized that they did not. Sponsors should regularly review multiyear forecasts of the plan’s funded status against varying economic scenarios so that they have a solid understanding of potential financial commitment they may face in the distant or not-so-distant future.
4. Understand benefit-restriction triggers and funding certifications. Amendments to plan provisions or special events, such as a plant shutdown, can trigger immediate benefit restrictions. They may also require immediate updates to funded-status certifications to avoid potential plan disqualification. Pension sponsors should review their governance structure to ensure effective coordination with all parties involved in such transactions or events, as well as the actuary.
5. Anticipate new Pension Benefit Guaranty Corp. reporting requirements. The PBGC is likely to add new “reportable events” requirements in 2010 and has also proposed eliminating most automatic waivers and filing extensions. These changes will increase sponsors’ reporting burdens and may have secondary effects, such as triggering disclosures under debt covenants.
6. Consider delegating investment discretion. Effectively managing a pension plan takes resources, time and specialized investment expertise. Many sponsors cannot adequately staff to handle the increasingly complex plans, making it difficult to properly react to capital market changes and opportunities. Sponsors should consider whether delegating investment decisions to a qualified fiduciary may better meet both sponsor and plan objectives.
7. Revisit the investment manager structure. Given the upheaval in financial markets and an unclear future, take an initial step and revisit the entire investment manager structure. Next, review how each asset class is structured and, finally, re-evaluate the fees charged by managers.
8. Review and verify risk tolerance. Increased market volatility has certainly shed light on the riskiness of certain investment products. This is a good time to reassess attitudes about risk, especially within alternative investments and other derivative-based products. Does taking on increased risk meet the overall objectives of the plan?
9. Set guidelines to avoid conflicts of interest. U.S. Department of Labor and Internal Revenue Service auditors are looking for potential conflicts of interest with anyone who may influence investment decisions. Plan sponsors should set formal guidelines for this process, including standards regarding gifts from current or potential vendors.
10. Take steps to prevent fiduciary pitfalls. When audits or lawsuits occur, the DOL, the Securities and Exchange Commission, external auditors and courts focus on the fiduciary decision-making process, not just the outcomes. Sponsors should review their own structures, including the roles and responsibilities of the benefits committee, to verify proper accountability, oversight and overall compliance.
Mercer has also compiled a companion list of resolutions for defined-contribution plans.