Defined benefit scheme sponsors and trustees focus more on critical funding-related risks impacting their schemes, due to continued market volatility and economic uncertainty, according to the MetLife Assurance 2011 UK Pension Risk Behaviour Index.

The study questioned 89 sponsors and trustees about their views on 18 investment, liability and business risks that affect their pension schemes, and assessed how well they believed they were managing those risks.

Both sponsors and trustees have ranked funding deficits as the most critical risk, despite the overall funding position of schemes improving. However, MetLife Assurance said that on an individual scheme basis, the lack of a consistent and sufficient funding level is not inspiring confidence.

Employer covenant was mentioned as the second most important risk, followed by asset and liability mismatch. The fourth biggest concern for sponsors and trustees was meeting investment return targets, and fifth place was for longevity risk.

The risk management priorities of scheme sponsors and trustees are much more aligned this year compared to the 2010 UK PRBI. With the spotlight on risk management, the 2011 UK PRBI found that trustees and sponsors have increased communications and reviewed their governance structure so as to better align their views on risk. As a result, they may now have a clearer understanding of their scheme’s individual situation, paving the way for a more coordinated plan of action to manage scheme risk in the future.

The gap between the most and least important risks among the 18 risks measured by the UK PRBI has widened significantly in 2011. This year the gap is 57%, compared to only 8% in 2010. While trustees and sponsors seemed to be unwilling to set any of the risks aside as potentially unimportant last year, this year’s results demonstrate that both groups are focusing their attention on a core set of key issues which should allow clearer prioritisation of action going forward.

The survey also highlighted a gap between how well the risks deemed most important are reported as being managed. Whilst funding deficits is regarded as the most important risk, it is ranked 12th in reported success. Similarly, asset and liability mismatch, the third most important risk, is ranked 11th in reported success, and longevity risk, the fifth most important risk, is ranked last in reported success.

Emma Watkins, director of business development at MetLife Assurance, said: “The results of this year’s UK PRBI are very encouraging. Sponsors’ and trustees’ view of risk importance appear to be converging, action has been taken on increasing communication and improving governance, and both parties have confidence in their ability to manage risk overall. However, as in the 2010 UK PRBI, the gap between the risks that sponsors and trustees deem to be most important, and the reported success they believe they have in managing them, provides insight into the challenges pension risk management presents.

Risks that are rated as high in importance but low in success in this year’s UK PRBI – funding deficits, asset and liability mismatch and longevity risks – represent the areas of highest concern currently. Improving the success measures for those risks will require focused and coordinated action on the part of both sponsors and trustees.”

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