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Aon Hewitt says UK DB pension schemes’ self-sufficiency targets are unreliable
New strategies needed to generate stability
NYSE: AON

LONDON, 23 June 2014 – Analysis by Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE: AON), has found that funding targets for UK defined benefit (DB) schemes to reach ‘self-sufficiency’ may not deliver the stability and certainty that trustees and sponsors expect, and that new strategies may be required.

In Aon Hewitt’s Global Pension Risk survey last year, the majority of UK pension schemes said that ‘self-sufficiency’ was their main long-term objective.  Over 70% of the 600 trustees and sponsors polled by Aon Hewitt, felt 'self-sufficient' funding positions should provide at least a 95% chance of meeting the members' benefits in full.  Almost 80% said that once fully funded, there should be less than a 10% chance of the sponsor needing to pay further contributions.

However, Aon Hewitt’s, ‘Pensions Stability White Paper – turning theory into reality’, finds that in most cases, typical self-sufficiency strategies do not provide the required degree of stability and certainty.   

Paul McGlone, partner at Aon Hewitt, said:
“Our findings suggest that true ‘self-sufficiency’ is expensive and hard to achieve.  Even modest risk accumulates over time, assets are volatile and the only way that a sponsor can be sure of not needing to pay more contributions, is to over-fund the scheme substantially.”

A clear disadvantage of over-funding for sponsors is that it means devoting more money in the initial outlay. Another is if the extra money means a higher chance of overpaying.  For a scheme to have a 10% chance of future deficit means that there is a 90% chance it will end up having a future surplus.
The challenge for trustees and sponsors is to balance the need for certainty with the desire not to pay more than required.  Aon Hewitt’s white paper suggests it is realistic for schemes to do this, but they need to look more broadly than conventional funding arrangements.

Paul McGlone added:
"Sponsors and trustees should look at options outside of the pension scheme, such as contingent assets, to provide the stability required.  While contingent assets are not new, as schemes approach full funding we see them having a role to play in long-term funding, rather than just being a specialist tool for specific situations.

“Importantly, creating stability is not just about a decision taking place in the future. For many schemes it should affect their short term decisions. Specifically this will be important for when contributions should be redirected from the scheme itself and into a contingent vehicle outside of the scheme.”

Balancing the competing demands of the parties in this way can lead schemes to identify a stability ‘sweet spot’ which sensibly addresses risk, does not excessively tie up corporate assets and gives a reasonable chance of getting to a buyout target in the long term. For example, Aon Hewitt's modelling for a typical scheme has found a ‘sweet spot’ centred on an overall funding target (scheme plus buffer) in the order of 105% to 108% of a ‘gilts + 0.5% p.a.’, with a corresponding investment policy.

Paul McGlone commented:
“We urge trustees and sponsors to review their funding targets and strategies and to take action to reach a position of stability – meaning fewer surprises, less intervention and a reduced chance of eventual surplus or deficit.”

 

Media Contact: 
Colin Mayes                                                     Marina Jane Sanchez
Aon Hewitt                                                       Capital MSL
01372 733689                                                   020 3219 8811
colin.mayes@aonhewitt.com                             marina.jane-sanchez@capitalmsl.com
 

Notes to editors

For more information about Pensions Stability please visit: http://www.aon.com/unitedkingdom/pensions-stability/

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 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.

 

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