How a Pension Fund Matures
The closer that employees in a pension plan get to retirement, the more mature that fund becomes. If a pension is not properly funded, that is if there are not enough assets to cover liabilities, as a plan matures, the plan members become at risk of not receiving retirement income. Pension administrators can prepare for a plan's maturity by making cash contributions, and in some cases taking more chances in the way that assets are allocated to the financial markets.
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Challenges
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A challenge for some pensions that are advancing toward maturity is that the amount of liabilities is growing faster than the cash contributions that plan sponsors contribute each year. In 2010, pension obligations at the Ontario Teachers' Pension Plan, for instance, outpaced cash contributions by nearly $2 billion, according to the OTPP website. Pension administrators are also having to manage plans in an environment in which the life expectancy of plan members has risen in the past couple of decades, which means retirees earn benefits for longer periods of time.
Approach
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The financial crisis of 2008 changed the way maturing pensions approach risk. Prior to the economic recession, in which many pensions lost significant value in the financial markets, the focus of pension administrators was largely competitive. It revolved around investment performance and outpacing market benchmarks. Following the crisis, the focus expanded not only to market returns but also to the health of assets relative to liabilities as the retirement fund matured, according to a 2011 report issued by consulting firm Aon Hewitt.
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Characteristic
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A characteristic that accompanies a maturing pension plan is decumulation, which is when benefit payments come due. Pensions are in need of a structural overhaul to keep pace with the level of decumulation that retirement plans face, according to a 2011 article on the Pensions & Investments website. Pensions that are in the decumulation stage should not allocate money to the financial markets with a long-term risk approach. This is because unlike newer pensions, the income needed from maturing plans cannot be sustained through extreme market volatility.
Frozen Plans
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As a pension fund matures, fund officials may perceive risk in a new way. This is especially likely during a market cycle in which pensions suffer because of lost market value. Throughout 2009 and 2010, as the financial markets began to stabilize after an economic recession, an increasing number of maturing pensions contemplated freezing plans, which closes pensions to new members but allows existing members to receive benefits. Ultimately, pensions mostly agreed to postpone freezing pensions for the time being, according to Aon Hewitt.
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