Volatility in defined benefit funding obligations isencouraging a new generation of technology solutions to helpsponsors better understand funding strategies and potentialde-risking options.

One iteration, PFaroe (pronounced pharaoh), a pension analyticstool was introduced to the U.K. market in 2009 by software firmRiskFirst.

It gives pension sponsors daily valuations ofassets and liabilities and tracks how potential disruptions inequity markets or interest rates may be affecting fundingbenchmarks in the immediate.

In effect, it is a monitoring capability on steroids, says CraigSvendsen, corporate defined benefit team leader at NEPC consultingin Boston.

NEPC, which consults for more than 100 pension sponsors withtotal assets of about $230 billion, recently announced it hasadopted the PFaroe platform, joining a list of other pensionconsultant firms that includes Callan, Northern Trust,Transamerica, and Natixis.

“Sponsors were once just concerned about how they were doingagainst peers,” said Svendsen.

The Pension Protection Act of 2006 changed that, he explained,shifting the focus from peer benchmarking to how fundingobligations were affecting a given company’s financials.

That, in turn, encouraged wider adoption of liability-driveninvestment strategies. Instead of simply managing a portfolio basedon annual returns, LDI centers the focus on managing the cashneeded to meet future obligations to workers.

With the shift to liability-driven strategies came the need formore timely valuations of plan assets and liabilities.

About 75 percent of NEPC’s defined benefit pension clients haveimplemented a liability-driven strategy, according to a companyrelease. Since 2011, about 75 percent have also developed acustomized asset allocation glide path, allowing sponsors to removeequity risk from portfolios when the plans hit a certain fundinglevel.

With PFaroe, the platform’s daily tracking capability allowssponsors to make more timely asset allocation changes whenappropriate, said Svendsen.

That need for timely monitoring and transparency has accentuatedas the pension risk transfer market has grown to record levels.

Pension buyout sales totaled $3.8 billion in the second quarterof 2015, a record for that period, according to LIMRA Secure Retirement Institute.

There were 62 buyout deals inked in that quarter, whichhistorically has been a slower period for de-risking—most activitytends to happen in the fourth quarter, according to LIMRA.

Another study from Mercer says that half of definedbenefit pension sponsors will be considering some form ofannuitized de-risking strategy in the next two years.

Svendsen says tools like PFaroe, which not only give dailyvaluations, but also cash flow projections, and the ability toforecast alternative investment strategies, can give sponsors anedge in the effort to improve funding status, particularly if theyhave an eye on one day annuitizing pension risk.

When funding status improves, so do a sponsor’s options in theannuity market.

“I wouldn’t say that every plan is looking to someday move totransfer pension risk to insurance companies, but I think all plansponsors are working to better understand what their options are,”said Svendsen.

Svendsen isn’t sure what percentage of NEPC’s client-base willtake advantage of the new technology right away. As is, thesponsors that do monitor plan assets daily are the exception, hesaid.

“A lot of sponsors, especially of smaller plans, are comfortableoperating as they are,” explained Svendsen. “Some plans don’t havethe internal manpower to monitor investments and execute changes ona daily basis.”

That said, he thinks the future trend will be toward more dailymonitoring.

“I expect some sponsors will use the service simply for thebenefits it gives to more frequent and transparent internalreporting,” he added.

And more sponsors will certainly need daily monitoringcapability if they are on a course to de-risk their plan viaa pension buyout.

“Monitoring your plan’s glide path on a daily basis gives asponsor more options, especially if they are looking to de-risktheir plan,” said Svendsen.

The new technology will come at a cost, though NEPC isstill in the process of factoring what it will be. The technologywill reside with NEPC, which is to say sponsors won’t have directaccess to it. Rather, NEPC will mine the platform and send thedaily analytics to sponsor clients.