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by Beverly Chandler, Opalesque London:

The Edhec Risk Institute has published a study, The Elephant in the Room: Accounting and Sponsor Risks in Corporate Pension Plans, based on a survey of how corporate pension funds, their sponsors and advisers manage pension risk and how pension funds manage sponsor risk.

The survey interviewed 100 respondents who manage pension fund assets of more than Euros 730 billion (US$ 1048.17 bn) and whose firms’ assets are greater than Euros 5.5 trillion (US$ 7.9 trillion). Sponsors who offer pension plans to their employees are subject to the risk of having to make additional contributions to make up any shortfalls in pension funds and in addition, face the more specific risk of arbitrary accounting assumptions that differ from those typical in financial economics. In other words, investment returns may well be different from what was expected.

The report says: "In a traditional defined-benefit (DB) pension plan, all of the financial and biometric risks in pension funds are borne by the sponsor (unless it goes bankrupt). Plan assets, however, are managed independently from the sponsor by pension trustees, and the separation of powers prevents trustees from managing these assets in the best interest of the sponsor, which can find it difficult to hedge pension risks in its own balance sheet. It is because of this separation of powers that many sponsors fail to manage pension risks at all; it also contributes to the termination of many......................

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