London, 10 March, 2014 – Analysis by Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE: AON), shows that UK pension schemes lack protection against movements in long term interest rates to the tune of over £400bn.

Pension scheme liabilities are highly sensitive to movements in long term interest rates - one of the biggest financial risks schemes face.  Aon Hewitt's analysis suggests that on average, closed and frozen schemes should be protecting against at least 70% of their interest rate risk.  Instead, the average amount hedged is thought to be nearer 30% to 40%. 

John Belgrove, senior partner at Aon Hewitt, said:
“Of course, any decision to change current levels of hedging needs to be made in relation to a scheme’s specific situation.  However, our analysis suggests that on average UK pension schemes are leaving themselves over-exposed to long term rate changes when compared to many other risks. Why take such unbalanced risks?  Even where pension schemes have taken action, the level of hedge taken is often still sub-optimal, and does not adequately address the issue. 

“When a pension scheme hedges out some of its fixed interest-rate liabilities, it effectively locks in a certain future rate.  Many pension schemes have been holding off implementing this kind of protection until rates rise. While it is true that short term rates haven’t moved, long term rates have moved up more than many expected, so now may be a good time to start taking more of this risk off the table.”
Over the course of 2013, there was a significant rise in gilt yields and more importantly a significant rise in future interest rate expectations

“Most schemes saw liabilities fall in 2013 in response to rising long term interest rates. This provided some welcome respite, but interest rates will not generate a return commensurate to the risk being taken in the longer term.  A pension scheme of any size can access solutions to remove the risk and find the right support and training to overcome the apparent complexities.

"Short term interest rates are clearly set to rise, but schemes should avoid falling into the trap that this means they should remain exposed to interest rate risk.”

Aon Hewitt suggests some steps for trustees to consider when it comes to dealing with interest rate risk:

– Understand and quantify the risks to which your scheme is exposed.

– Understand the impact further interest rate (and inflation) hedging can have on your scheme.

– Undertake training on liability risk management tools.

Media Contacts:    
Colin Mayes                                       Adam Leviton
Aon Hewitt                                         Capital MSL
01372 733689                                     020 3219 8810
colin.mayes@aonhewitt.com                adam.leviton@capitalmsl.com

Notes to Editors
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 retirement 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 reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions 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.com for more information on Aon and www.aon.com/manchesterunited to learn about Aon’s global partnership and shirt sponsorship with Manchester United.