LONDON (03 August 2015) - Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE:AON), today published the UK findings of its Global Pensions Risk Survey 2015 which show no let up in the challenges for UK pension schemes.
The survey incorporates responses from 220 UK defined benefit (DB) pension schemes, representing 4.5 million members and almost £500 billion of assets.
While pension scheme funding remains a sizeable problem, the survey demonstrates significant progress in how UK pension schemes are planning for, and managing, risk:
• 94% of UK schemes surveyed have a long-term objective, compared with 70% in 2009 (over and above being fully funded on their ongoing Technical Provisions assumptions).
• 27% of schemes surveyed identify buyout as their long-term objective, with 65% aiming for a self-sufficiency/low risk approach.
• The average target date for reaching their end point is around 2027.
• Over half (53%) of schemes surveyed view their plan for reaching the long-term objective as ‘robust’.
Kevin Wesbroom, senior partner at Aon Hewitt, said:
“DB pension schemes have undergone a wholesale transformation over the past decade and they are now much better equipped to identify and manage the risks they face. The credit crisis served as a wake-up call for sponsors and trustees, driving them to clarify long-term goals and put in place robust plans for achieving them. This change in attitude and subsequent demand for solutions has meant the range of risk management tools that DB pension scheme sponsors and trustees have at their disposal has never been greater.
“Despite this, schemes still face an uphill struggle as funding positions remain woefully short of their targets in this low yield environment. The 12 year timeframe to meet the long-term objective remains consistent with our 2009 survey, despite the passage of time and six years of contributions - the future just keeps getting further away! Our survey shows that schemes are actively considering ways in which they can reduce their liabilities, particularly ahead of the end of contracting-out in April 2016.”
Diversification, dynamism, de-risking and delegation
Aon Hewitt’s Pension Risk Tracker shows that the aggregate winding–up deficit for FTSE350 company pension schemes was over £320 billion at the end of June 2015. The figures show that despite positive momentum in equity and bond markets, there is little discernible funding progress since 2009.
John Belgrove, senior partner at Aon Hewitt, said:
“Over the past 10 years, many UK pension scheme sponsors and trustees have undergone a transformation in attitudes towards funding and dealing with challenging, fast-paced markets. With schemes being forced to adapt to a new reality, and develop greater clarity around long-term objectives, there is a notable shift in typical investment strategies.
“Our series of Global Pension Risk Surveys has documented a very clear trend towards 4Ds - diversification, dynamism, de-risking and delegation. Schemes continue to decrease their total equity holdings and increase allocations to lower-risk matching asset classes or LDI, driven by an appetite to control risk. Despite historically low gilt yields, de-risking showed no sign of slowing over the past 12 months and is expected to continue."
Combined with diversification into alternatives, we are now seeing pension schemes which have much lower overall risk profile. This has led to greater complexity and, often, leverage for capital efficiency purposes. In response, trustee boards have added more specialist resources and delegated further to professionals to execute strategic plans set by the trustees.
John Belgrove continued:
“While becoming less tolerant of risk, pension schemes are more savvy and nimble with the remaining growth assets – using sophisticated tools and monitoring systems to stay on top of prevailing market conditions. Asset strategy is more than ever closely aligned to liability obligations, measured deficit closure and a smoother funding journey with better defined long-term objectives. Structures which allow schemes the flexibility to be opportunistic, such as delegated services, have emerged as a consistent trend. While funding levels remain challenging this more targeted and focused approach to pension fund investing bodes well for meeting their future objectives.”
Aon Hewitt’s Global Pension Risk Survey was first completed and published in 2006. It is a comprehensive and authoritative indicator of how pension schemes around the world are measuring, monitoring and planning in relation to risk.
Aon Hewitt’s Pension Risk Analyzer is available at: https://pensionrisktracker.aon.com/
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For further information please contact:
Colin Mayes Marina Jane Sanchez
Aon Hewitt CNC
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