EUROPE - Pension fund executives have been advised to improve their diligence and monitoring of corporate sponsors' covenants and counterparty risks in the current economic climate at the same time as watching their fluctuating liabilities.

Calculations by consulting firm Mercer suggest the UK's top 350-listed companies' pension plans collectively generated a surplus of £1bn (€1.29bn) on 30 September 2008, even though assets fell in value by £39bn.

However, officials warn all pension trustees, boards and companies need to pay close attention to the paper insurance they have on their liabilities during the ongoing economic downturn as companies will find with cash and liquidity drying up, the underlying corporates could face increasing pressure themselves should the liabilities of a pension fund worsen in the turmoil.

The Mercer Pension Update noted "there remains an investment bias towards return-seeking assets so exposure to equity market volatility still accounts for a substantial portion of total risk". 

Deborah Cooper, principal at Mercer's retirement business, also suggested schemes most exposed to equity markets present a high risk to the financial position of their sponsoring employer given the uncertainty in global financial markets.
 
"Recent high profile corporate failures act as a stark reminder of the very real risk of sponsoring employers becoming insolvent, which could leave members with reduced benefits if funding levels are low," said Cooper.
 
Similarly, the increased focus on risk management and use of complex investment strategies could find trustees and sponsoring employers exposed to a wider range of covenant risk, even where it does not originate from the sponsoring employer.
 
 "This counterparty risk originates from schemes' reliance on the ability of external entities to meet their obligations and relates to positions in investments such as swap contracts. The demise of some of the world's largest banks shows that, while risk can be mitigated and transferred, eliminating it altogether is nearly impossible.
 
"Trustees must diligently measure and monitor the credit risk of sponsoring employers as well as any counterparties the scheme relies on. Sponsoring employers should also be concerned, since they are likely to be exposed to any shortfalls created by the collapse of external counterparties."

Topics