LONDON (14 July 2016) – Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE:AON), has said that funding and investment issues are dominating pension scheme concerns after the EU Referendum.
In its ‘Brexit and UK Pensions’ webinar, attended by representatives of over 200 schemes, polling showed that for defined benefit (DB) schemes, the biggest concerns were the need for companies and trustees to discuss funding impact (58% of those who voted), closely followed by the impact of Brexit on employer covenant (47%) and the need to review interest rate and inflation hedging (44%).
John Belgrove, senior partner at Aon Hewitt said:
“Despite the uncertainty, schemes are recognising that action does need to be taken. They see the need for tools to enable them to monitor their position in the volatile markets and also the need for tailored advice. Our research since the vote has shown that the outcome for schemes has varied considerably - some even improving their funding position – but with the outcome particularly depending on their level of hedging to date.
“I support schemes which want to review interest rate and inflation hedging, and I believe that even if you have a strong view that interest rates will rise faster than the markets predict, there are better places to take less risk to seek equivalent return."
Aidan O'Mahony, head of the Covenant team at Aon Hewitt, said:
"Although it may be some months until companies have fully worked through their Brexit plans, trustees can start now by looking at some of the sector indicators of whether their covenant is likely to be a winner or a loser. They can also consider the key performance indicators that would show if their covenant was going off track and plan for the range of Brexit scenarios."
Impact on DC
For defined contribution (DC) schemes, 64% indicated that reviewing the default investment option was one of their top three priorities, with the need to understand the impact on members’ accounts and expected retirement income, not far behind on 58%, and with 50% saying that member communications was also in their top three.
Lynda Whitney, partner at Aon Hewitt said:
“DC members face a significant change to their saving environment. The extent of the impact will depend on the age of members, how they are invested, and what they are trying to target at retirement. Older members with lifestyling and target date funds will have seen some protection, but for others the impact may already have been more marked.
“As our poll showed, a review of the default investment option to ensure it meets members' needs is now high on the agenda for most DC schemes. However, the fact is that all members may need to consider paying higher contributions to meet their income expectations. That makes clear communication from trustees or employers to members even more crucial than normal.”
Top Ten post-vote actions
Lynda Whitney continued:
“While we recognise that there is still considerable uncertainty surrounding Brexit, we believe that there are steps schemes can take now to actively re-assess their situation and to form and follow an action plan.
“With that in mind we have developed a Top Ten action list for schemes in this post-Referendum environment.”
1. DB and DC - Communicate with members
2. DB - Review covenant
3. DB and DC - Right size risk - review interest rate, inflation and currency hedging
4. DC - Review the appropriateness of the default fund
5. DB and DC - Are you on track? Understand current impact
6. DB and DC - WiIl you be on track? Understand whether future projections are lower
7. DB - Review funding negotiations (depending on the valuation cycle)
8. DB and DC - Review impact on projects such as transitions and adding member options
9. DB - Look for opportunities – e.g. bulk annuity
10. DB and DC - Consider the global implications including employee mobility.
Lynda Whitney continued:
“We would regard these actions as the starting point for schemes. In DB we have seen changes in all three parts of integrated risk management at once; the funding, the investment and the covenant, - all creating new opportunities as well as threats. For DC members there is also significant change that they need to be guided through. If schemes – whether DB or DC – use this Top Ten as at least their initial guide, we believe they can improve the position for their members by taking actions both to manage the risks and to seek opportunities.”
For further information please contact:
Colin Mayes Marina Jane Sanchez
Aon Hewitt CNC
01372 733689 020 3219 8811
Notes to Editors
Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: http://aon.mediaroom.com.
Follow Aon Hewitt on Twitter: https://twitter.com/AonHewittUK
Sign up for News Alerts: http://aon.mediaroom.com/index.php?s=58