Many pension plan sponsors are taking on funding status risk significantly above their risk tolerance. In this paper, we describe the primary risk factors and the tools available to manage them. Focusing on investment/portfolio risk, we explore how Vanguard helps clients set their investment strategies to mitigate risk and measure the risk inherent in their plans so it is consistent with their stated tolerance.
Overall, our research finds that if a one-year decline of 10% in funding status is unacceptable and less than 60% of a pension's assets are invested in hedging interest rate risk, it may be time to review the plan's investments and possibly the pension risk management framework. Following a defined and documented risk management process can help align the competing goals of managing risk and pursuing a solid rate of return on assets.