CHICAGO (Jan. 21, 2020) –The percent of plan sponsors reporting that their long-term objective is to settle their pension obligations has more than doubled in two years, according to new data released by Aon plc (NYSE: AON), a leading global professional services firm providing a broad range of risk, retirement and health solutions. In the 2019 edition of its Global Pension Risk Survey, Aon found that 37% of respondents report this is the case, up from 13% in 2017.
U.S. plan sponsors are continuing the trend toward closing and freezing plans, with growing interest in partial liability settlements or full plan termination. In 2019, 33% of respondents reported implementing or being likely to implement partial settlements while 14% reported the same for full terminations. The percentage of U.S. corporate pensions settling liabilities through pension risk transfer strategies has grown from less than 1% in 2009 to approximately 9 percent in 2019.
“A broader trend toward de-risking continues, as pension risk management grows increasingly diverse and each sponsor considers its own unique circumstances amid an expanding range of risk management tools. Most sponsors have taken significant steps to materially reduce pension risk,” said Paul Rangecroft, Practice Director of North America Retirement Solutions at Aon. “In addition, as interest rates decrease and the equity markets show signs of fatigue, most sponsors are now better positioned to weather a downturn than they were in 2008.”
Additional findings in the U.S. survey include:
- Respondents reduced exposure to equities by shifting to lower risk portfolios over the prior 12 months. The percentages represent the percentage of respondents reporting an increase in the asset class, less the percentage reporting a decrease.
- 34% net increase in Treasury bonds.
- 36% net increase in corporate bonds.
- 45% net reductions in U.S. equity allocations.
- Derivatives are playing a greater role with a 23% net increase in respondents reporting an increase in the use of derivatives over the prior 12 months and 8% in those expecting to increase the use of derivatives in the next 12-24 months. This may be partially driven by the increase in outsourced chief investment officer (OCIO) solutions, which allow easier access to more sophisticated hedging strategies such as completion mandates.
- Hedge ratios, the ratios of exposure to a hedging instrument to the value of the hedged assets, continue to rise. A significant minority of sponsors still choose to hedge less than 20% of their interest rate risk.
There has been a massive shift among U.S. plan sponsors toward an OCIO structure in the last decade. In 2011, 23% of respondents were ‘very likely’ to fully delegate implementation of their investment policy or had already done so. In 2019, that percentage has nearly doubled, with 38% already in full delegation mode and another 6% ‘very likely’ to follow.
“While there has been a shift to OCIO as the preferred operational and governance structure to implement the desired de-risking strategy, our survey respondents also predict that in the next few years there may be a slowdown in de-risking if the recent drop in discount rates persists,” said Bryan Ward, Practice Leader of Corporate Retirement and Senior Partner at Aon.
The survey of 90 respondents represents various industries and plan sizes, covering topics that include pension risk management, investment strategy, cyber risk and governance and delegation.
For more information, the U.S. results of Aon’s Global Pension Risk Survey 2019 report are available here.
Aon plc (NYSE: AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.