Building calm after the storm: getting pension plans back on track and keeping them there will require time, resources and--most importantly--organizational determination. Here's how.

• Author: Hess, Carl
• Position: PENSIONS

The economic storm has left many defined benefit plans significantly worse for wear. Plans that had been fully funded or overfunded will now require significant cash inflows to return them to required levels.

As a result, sponsoring organizations are facing the prospect of making large cash contributions at a time when they can least afford to.

Getting pension plans back on track and keeping them there will require time, resources and--most importantly--organizational determination. In addition, financial executives will face enormous pressure to alter their plan management to prevent another funding catastrophe.

Ironically, while the ability to make changes will increase as conditions improve, the desire to do so will likely recede.

Plan management strategies that are focused on improving funding status will likely require more cash than is currently available. Though there is no easy way to rebuild from financial wreckage, it is possible for financial executives to help protect against continued or future deterioration by using less cash-intensive approaches.

By taking steps to reengineer their pension plans, organizations can ensure their plans' underpinnings are strong enough to withstand terrible economic times and still take advantage of periods of calm and growth.

Dynamic Plan Management

To avoid future pension-funding problems, rigorous management techniques must be employed. With so many competing priorities, pension plans often may not get the attention or resources warranted as compared with the potential negative outcomes from unmanaged situations.

As a result, many plan sponsors are unable to focus enough on real risk management, making it increasingly difficult to develop and execute a strategy to meet a plan's specific needs.

Historical trends in pension plan management show widespread uniformity. This largely ignores the actual diversity among plan sponsors, their objectives and the size and potential risk exposure of these plans relative to their sponsoring organizations.

A pension plan that is only a fraction of the size of its sponsoring organization, for instance, is often managed in a similar way to that of a plan that is 10 times the size of its organization. But the implications of any funding shortfall in these two situations would be very different. Thus, these hypothetical plans may require vastly different plan management approaches.

Risk Management Hierarchy

Rebuilding can be a long and arduous process that...