LONDON, 20 May 2014 – Analysis by Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE: AON), shows that UK pension schemes are losing out on £1.7 billion in potential annual returns by accepting passive-style performance from actively managed funds.

The UK’s pension industry managed £2 trillion of assets at the end of 2013, of which 42% (£840bn) was invested in equities.  Aon Hewitt's analysis suggests that £460bn of this was actively managed, with the remaining £380bn held in passive funds.  Around 75% of the £460bn actively managed assets were, and still remain allocated to core active funds, which do little more than track their benchmark - resulting in UK pension schemes receiving sub-optimal returns on approximately £350bn of assets. If these assets could deliver an extra 0.5% a year either through better returns or lower fees that would be an extra £1.7bn in the real value of pension plan assets per year.   

John Belgrove, senior partner at Aon Hewitt, said:

“Trustees should review their equity portfolios to ensure they are getting the appropriate performance from their investment strategy.  Schemes committed to an active approach should steer clear of managers that charge a high fee for essentially matching an index.  To deliver performance in excess of the benchmark, schemes must be willing to take risk and follow a broad, unconstrained strategy using the very best ideas and with the highest conviction managers.  

“Undoubtedly, high conviction portfolios demand a large commitment of time, resource and budget from trustees to deliver long-term outperformance.  We find strong evidence that better results require stronger governance. Governance-constrained schemes may therefore benefit from seeking help with manager selection and implementation responsibilities.”  

Aon Hewitt sees three distinct paths to success in public equity management for pension scheme trustees to consider:

• Get Active - With an effective governance framework in place, commit to a high-conviction, unconstrained approach. Be prepared to respond to changes, maintain a complementary portfolio of the highest-quality managers and implement broad mandates of best ideas stocks.

• Get Help - Active management requires active engagement but if that associated governance burden presents a challenge, invest in a fiduciary solution to optimise a high-conviction unconstrained approach. 

• Get Smart – A lack of conviction in active management infers a low-cost passive approach is preferable. Tracking a mix of alternative index or factor based strategies can deliver better long-run results compared to a traditional passive approach, with straightforward implementation and limited governance requirements.

Tim Giles, partner at Aon Hewitt, said:

“If trustees have a preference for passive equity management, they should also check that they are achieving the best possible performance.  Rather than following the herd and focusing on mainstream indices, schemes should consider the potential benefits of a smarter approach to passive management. For example, tracking alternative indices has frequently been shown to provide schemes with better risk-adjusted returns over the long term.”

- Ends –

Aon Hewitt Investment Consulting
Aon Hewitt Investment Consulting provides institutional investment advisory experience and knowledge to over $4 trillion assets throughout the world. Our services include alternative financing, compliance/operational due diligence, custody, delegated consulting, flight planning , global asset allocation, governance, liability management, manager research, risk management, risk modelling, risk settlement and transition etc. Our capability is founded on a large and diverse team of investment specialists who include former fund managers, investment bankers, economists and financial analysts among others.

About Aon Hewitt 

Aon Hewitt empowers organisations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organisational and personal performance and growth, navigate risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness.  Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide.  For more information on Aon Hewitt, please visit www.aonhewitt.com.

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About Aon
Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurancebrokerage, and human resources solutions and outsourcingservices. Through its more than 66,000 colleagues worldwide, Aonunites to empower results for clients in over 120 countries via innovativeand effective riskand peoplesolutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world’s best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit www.aon.comfor more information on Aon and www.aon.com/manchesterunitedto learn about Aon’s global partnership and shirt sponsorship with Manchester United. 

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