“Pensions are constantly in the headlines because they represent a very real risk for businesses,” said Kevin Wesbroom, Head of Global Risk Services at Hewitt. "Now, more than ever, companies need to understand, monitor, and take action to deal with the risks that defined benefit pension plans pose to their businesses".

Robert French, Pension Risk Manager at British Airways, joined Kevin to describe how BA tackled their particular pension problem. “The company was in the situation where the pensions issue was massive and threatened the company's ability to re-invest for the future." he explained. "Doing nothing was not an option. Drawing on the strengths of our organisation, in terms of both finance and HR input, we embarked upon a massive change programme leading to a solution which included a major cash injection from the company as well as some compromises for employees.”

Click here for a summary of the BA pension solution

Clearly pension risk is an issue to be monitored closely – and one tool to do this is the Hewitt Pension Risk Benchmark, helping companies to measure their risk against other top companies.

As well as the Risk Benchmark, Kevin highlighted tools that Hewitt uses to monitor risk and funding exposures on a daily basis for clients, as exemplified by the DJ Eurostoxx pension fund surplus index. Using this index series, Kevin pointed out just how disconnected pension fund accounting liabilities have become divorced from reality, in the turbulent market conditions post credit crunch. Driven by higher yields on corporate bonds, accounting liabilities seem to be trying to get to zero faster than assets values!

But what has caused all the trouble? Kevin highlighted a number of culprits – accounting, the balance between assets and liabilities, indexation – and even the fact that people are living longer.

“Every day, our life expectancy increases by four to five hours,” he said. “While this is great news for the human race, if you are committed to paying out an annuity for a person’s lifetime then it represents a huge and growing liability that must be funded.”

Issues such as these have transformed the way we look at pensions – they are no longer simply a great employee benefit provided by benevolent employers, to help their organisations recruit, retain and motivate talent. They increasingly represent a legacy obligation, which, from the financial perspective, companies would get rid of, if only they could. However price remains the biggest barrier and so Kevin suggested that alternative solutions – such as longevity swaps with an investment bank – could increasingly become part of the armoury that plan sponsors will need to consider to control their overall risk levels.

Hewitt's 2008 Global Pension Risk Survey shows that the face of pension fund investments has changed dramatically. The old focus on maximising long-term returns, mainly with equities and bonds, has been replaced with a far more complex picture. Now the focus is on minimising risk, taking a shorter term view, benchmarking assets against liabilities and using a far wider range of asset categories within investment portfolios - fewer equities (and greater diversification within equity portfolios) more bonds and more alternatives, such as hedge funds, private equity, infrastructure and commodities. Against the backdrop of rapidly changing markets, and greater complexity, it was not surprising that the Survey showed more clients willing to delegate investment decision making to their consultants.

Read the extract from Hewitt's Global Pension Risk Survey (available to download on the right) for the latest trends in Pension Risk management.

So with Pension Risk firmly back on the CEO agenda, what actions should you be taking to ensure that the issue receives better attention in your organisation? The results of the Global Risk Survey give a few pointers:

• Monitor your risk exposures obsessively.
• Consider whether additional disclosure of pension risk will be helpful.
• Consider whether pension risk should become part of a more enterprise-wide approach to risk.
• Consider whether the current turmoil represents an opportunity to de-risk your benefit package further.
• Consider how to optimise your existing assets, and the most suitable governance structure to achieve this end.