Make Your Own Luck: Navigating Pension Risks in a World of Terminations
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The legal drama "Suits" follows the lives of ambitious lawyers at a prestigious New York City firm. If you’ve not seen it, at the heart of the series is Harvey Specter, a successful senior partner known for his arrogance and ruthless ambition. A master in the courtroom, Harvey outmaneuvers opponents with his quick thinking and persuasive arguments. Yes, he’s intimidating, but he’s also deeply loyal to those he trusts, particularly his protégé, Mike Ross. He pursues his goals with calculated risk-taking and determination. Harvey would say, “I don’t get lucky. I make my own luck.”
Harvey’s "make your own luck" philosophy could well describe the posture pension fund managers may need to take considering the challenges confronting them in the current environment of increasing pension terminations. Navigating the complexities of the financial markets while ensuring the long-term security of pension benefits requires a proactive and strategic approach. Pension fund managers need to “make their own luck” like never before.
The Rise of Pension Terminations
Recent years have witnessed a significant increase in the number of companies terminating traditional defined-benefit pension plans. This trend, driven by factors such as increased participant longevity, lower interest rates, and stricter regulatory requirements poses significant challenges for both employers and plan participants.
Key Risks for Pension Funds
In this current environment, pension fund managers face an intensified set of challenges, including Funding Shortfalls: Where plan liabilities have increased and investment returns have failed to keep pace, the resulting shortfall becomes a major concern. Added to this potential risk are ongoing Regulatory Pressures: Increased scrutiny from regulators together with added and more restrictive regulations increases pension plan financial and operational burdens. And, clearly, Market Volatility: Fluctuations in the stock market and interest rates can significantly impact the value of pension assets, exacerbating funding challenges.
Strategies for Mitigating Risk
To mitigate these risks and the caprice of luck, fund managers can ensure the long-term sustainability of pension plans by:
- Implementing Robust Risk Management Strategies: This includes diversifying assets, hedging against interest rate risk, and carefully monitoring and managing credit risk.
- Exploring Alternative Funding Mechanisms: Alternative funding options such as pension risk transfer (PRT) strategies can help to de-risk pension obligations.
- Advocating for Policy Changes: Mangers can support policy changes that address the challenges faced by pension plans, such as regulatory reforms and increased funding flexibility.
- Engaging in Proactive Communication: While less of a strategy to mitigate risk, prudent managers will maintain open and transparent communication with plan participants regarding the financial health of the plan and any potential changes.
The Harvey Specter Connection: Make Your Own Luck
Just as Harvey judiciously weighs situations and pursues calculated risks, pension fund managers can do the same by conducting thorough research and analyses: Understanding the specific risks facing the pension plan and the potential impact of various market scenarios undergirds a robust investment strategy. If research and analysis are prerequisites, a robust strategy that develops from them should incorporate risk mitigation measures, such as hedging and diversification. And finally, not surprisingly, the strategy should be monitored continuously and adapted, as necessary. Changing market conditions and evolving regulatory landscapes demand monitoring, on a regular schedule and intermittently when environments change.
What’s Better Than Luck? Preparation. And Highland Can Help
Harvey would likely agree that luck is an unreliable partner. Pension plan managers make their own luck by proactively managing these challenges to ensure the long-term security of pension benefits for plan participants, even in the face of increasing termination pressures.
We at Highland dedicate our practice to this kind of preparation, the kind that looks over the horizon to anticipate and respond to events and market dynamics that affect your plan. Our clients don’t wait for luck to strike. They count on us to help make luck happen.
Highland Consulting Associates, Inc. was founded in 1993 with the conviction that companies and individuals could be better served with integrity, impartiality, and stewardship. Today, Highland is 100% owned by a team of owner-associates galvanized around this promise: As your Investor Advocates®, we are Client First. Every Opportunity. Every Interaction.
Highland Consulting Associates, Inc. is a registered investment adviser. Information presented is for educational purposes only and is not intended to make an offer of solicitation for the sale or purchase of specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
