Managing Pension Risk in 2022 and 2023


Updated August 2023 – All pension plans inherently carry some level of risk, often categorized into three specific types: governance risks, risks related to the funded status, and risks concerning legal and compliance matters. Plan sponsors need to understand the various risks that their pension plan poses to their organization and then decide how to manage those risks. They can choose to minimize, eliminate, or fully take on the various risks and there are many different tools available to plan sponsors to help them handle a given risk.

First, let’s define what we mean by “risk”. In general terms, risk is the exposure to the chance of injury or loss, or in the investment sense, it’s negative volatility. Defining the three categories of risk:

  • Governance Risk – This represents the danger that the inherent structure for making decisions in place for the plan may not be effective. These could lead to missed opportunities or an imbalanced risk profile within the plan and organization.
  • Funded Status Risk – The chance that a plan’s funded status might deteriorate to such an extent that the required cash contributions (or balance sheet liabilities/income statement expense) negatively impact the sponsoring entity.
  • Legal/Compliance Risk – This risk involves the possibility of identifying issues during an inspection that indicate the plan has not been operated in accordance with legal rules and regulations. This could potentially lead to disqualification, penalties, or delays in decision-making during plan termination.

Governance Risk

Crafting a governance structure for pension plans is a challenge that many plan sponsors face. But having the right structure in place will allow the plan to make effective decisions in a timely manner.

Some committees decide to have certain functions automated (e.g. automatic glidepath triggers, outsourced investment management). For a more hands-on committee they may prefer to hold on to the decision-making process for each decision. One pitfall for governance committees to avoid is not being able to come to a consensus soon enough to take effective action, resulting in missed opportunities.

Each plan sponsor is different and each one will need to decide how decisions are made, including which decisions are retained versus outsourced. As we look forward, plan sponsors are hopeful for a market rebound. In such times, an agile governance structure capable of effectively recalibrating the asset allocation becomes even more crucial. Organizations equipped with such structures are likely to gain, while those lacking them may suffer adverse effects.

Funded Status Risk           

The two most common ways that plan sponsors look to address funded status risk are through their asset allocation and pension risk transfer strategies.

Asset Allocation

Rates are up significantly meaning many plan sponsors, particularly those whose assets were not 100% liability-matched, will have likely seen funded status improvements due to the plan’s liabilities falling further than its assets. This will depend on the plan’s return seeking portfolio, influenced by the high market volatility and significant declines in equity markets.

One such way that still allows for equity growth and/or interest rate growth is through the use of derivatives.  Derivatives such as zero premium swaption collars and/or shaped equity can efficiently help to protect a plan’s increased funded status position against potential future rate or equity declines.   

Pension Risk Transfer

There are two primary pension risk transfer strategies that have been commonplace over the last ten years that have been used to eliminate funded status risk as opposed to mitigating it: lump sum cashout windows and annuity buyouts.

  • Lump sum cashout windows – can be advantageous to shrink the overall vested terminated participant population. 
    • With the SECURE Act in 2019, there is also the possibility to open up this type of strategy to active participants over age 59 ½. Timing a lump sum strategy is critical for plan sponsors, as not every year produces the economic environment that can be beneficial to plan sponsors. In general, in years with an increasing interest rate environment (e.g. 2022), plan sponsors may find that the lump sum payments paid out are more than the economic liability they are releasing from the plan, thus deteriorating the funded status. There still may be advantages if the plan is subject to the PBGC variable rate premium cap, especially if the lump sums are related to small benefits.
  • Annuity buyouts – have seen steady growth over the last decade. The market was slightly stymied with the pandemic, but then soared to record high sales in 2021. So far this year we continue to see favorable pricing for plan sponsors on both in-pay and deferred annuities.
    • The big question when evaluating an annuity buyout will be around which assets to sell to cover the premium. This isn’t always an easy decision and will be highly dependent on a plan sponsor’s view on future interest rates, equity markets and cost savings resulting from the annuity placement.

Legal/Compliance Risk

The legal and compliance risk that a plan sponsor faces can sometimes be overlooked. Too often we’ve seen a reliance on a third party who doesn’t carefully address plan documentation, distribution procedures, and plan level data that results in operational failures. Left unchecked, these failures can result in costly fixes and a substantial time commitment from the plan sponsor.

For plan sponsors that have outsourced the plan administration function, they still need to ensure that the plan administration is correct. Our experience has been that almost every plan has some issue that needs to be remedied – some more severe than others. Having an independent plan review by a qualified provider can be one way to mitigate this risk. 

Even though plans are audited each year for financial reporting purposes, the goal is to ensure that processes are in place, not correct. 

  • Are the forms of payment offered to participants in election packages the same as what the plan document allows? 
  • What about the allowance for non-spouse beneficiaries? 
  • Are election forms properly filled out and notarized where necessary? 

These might seem obvious, but we’re always surprised by how many times we come across a plan that has issues with those specific items.

Identifying and fixing operational issues can be more cost and time effective if addressed now rather than finding out there are problems when you’re ready to implement a big project (e.g. pension risk transfer or plan termination).

The best way for a plan sponsor to manage pension risk is to take on a review of the risks and owning, mitigating, or eliminating those specific risks.

Hire the Experts and Reduce Pension Risk

Maximize results and minimize headaches with our actuarial services, designed to align with your long-term goals and immediate needs. Take control of your pension plan’s success. Contact Agilis and let us customize a plan that fits your needs perfectly. 

We believe prudent managemen

Every pension plan has risks, but how they are managed will determine how successful the plan sponsor is with respect to how those risks affect the company.


t will lead to better outcomes for plan sponsors to help them accomplish their overall goals and objectives with their plan. Every pension plan has risks, but how they are managed will determine how successful the plan sponsor is with respect to how those risks affect the company.


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