Watch out for benefits plan risk

A Mercer survey of 114 multinationals finds that only 16% of respondents feel that their existing governance structures are sufficient to meet current and anticipated future needs, while 77% say they have plans to facilitate better management of risk globally. Many are planning or considering changes to elements of their governance frameworks to ensure that they deliver on objectives.

“For many multinational organizations, the financial crisis in major markets and the impact on benefits programs were unanticipated, and they paid insufficient attention to risk management activities, such as scenario planning and extreme event modeling,” says Vicki Stokoe, global governance consulting leader with Mercer. “To make matters worse, companies lacking ready access to key information or without an established decision-making structure struggled to respond quickly and effectively.”

Risky benefits
When asked about the extent to which their benefits plans affect key aspects of their business, 93% of respondents said the plans pose a potential risk to the organization’s business strategy. Eighty-one percent said the plans pose a financial risk to the company and 93% said they are a potential source of reputational risk.

Mercer says more work is needed to understand the actual level of risk faced by organizations and to mitigate it. The firm highlights the following areas for special attention:

• Decision-making structures: Only 23% of respondents currently have a global committee in place and only 3% have a regional committee structure. Forty-three percent are considering establishing one. In 29% of cases, ultimate responsibility currently sits with one or two individuals. While the HR function is well represented, the finance function is involved in less than half of those cases.
• Global policy: The use of written policies to give clear direction for local decision-making is limited to a few areas of plan management: accounting (44%), benefits design (36%) and funding (32%). Only 24% of respondents have established directional policy for the investment of plan assets.
• DC focus: A “hands off” approach to benefits plan administration, member communication and vendor management prevails. While 92% of respondents sponsor defined contribution (DC) retirement plans in some or all geographies, most decision-making on these critical DC issues remains with local management or fiduciary boards, with little involvement from the corporate head office.

Stokoe suggests that the range of activity that receives global attention should also be expanded. “Most organizations focus on plan design and funding decisions, but few devote the same attention to investment policy and monitoring,” she says. “An integrated approach is needed to effectively manage risk. Equally, for organizations with DC retirement plans and non-retirement benefits plans, operational and communication risks require active management. Current policy and oversight suggest that these risks are not yet fully appreciated—to the detriment of workforce planning and employee relations.”