The biennial survey saw responses from 185 UK schemes, with 4.5 million members and £500 billion of assets. Most apparent among the findings was the growing appetite for de-risking and the increasing range of actions being taken.
Matthew Arends, partner at Aon Hewitt said: “The UK findings of this year’s Aon Global Pension Risk Survey report that just 4% of respondents had implemented an Integrated Risk Management (IRM) plan with actions, and 46% either had no IRM plan or had not documented it. This is despite this year’s Pensions Regulator’s (TPR) annual funding statement stating that “all schemes need to put contingency plans in place” and “[that] this contingency plan needs to be agreed with the employer in advance and should be legally enforceable”.
“That is an ambitious target and does raise the question of how far UK pension schemes are from this goal. But this year’s survey would suggest that they may be closer than is at first apparent, as schemes have clearly taken significant actions to manage their risk effectively in the two years since our last survey. For example, 89% of schemes now report that they monitor their technical provisions quarterly or more frequently (96% for the assets).”
Matthew Arends continued: “It’s also clear that the two risk settlement measures of bulk annuity purchase and longevity swaps that were largely the domain of smaller and larger schemes respectively, are now both becoming commonplace across the whole range of scheme sizes. This gives a context to our next finding.
“Approximately 90% of schemes have a long-term low risk or buy-out objective, and the time estimated to reach that objective has reduced from an average 12.0 years to 11.1 years since 2015 - despite the low gilt yields schemes have experienced.
“So, while UK defined benefit (DB) pension schemes may be some way away from having the documented IRM plans with specific actions that TPR would like to see, there is no doubt that are taking action in all the ways available to them, and plan to do even more in the future.”
Key results of survey
• The proportion of frozen schemes is now over 50%. For those actives still accruing DB, benefits have generally been reduced as far as possible so that schemes have either accepted the cost of DB or the only remaining step is freezing.
• Liability management options each show increases from 2015, but the step up in Flexible Retirement Offers (FROs) - transferring out rather than retiring with the DB scheme - is particularly significant with 22% of respondents having implemented one, up from 5% in 2015.
• In contrast to interest rate risk, a third of respondents have not considered longevity risk. But the third who have decided to hedge this risk have generally already acted or expect to act within five years. Once the case is made, schemes do not hang around.
• Significant minorities of schemes are expecting low gilt yields to be temporary (16%) and/or that they will have a longer recovery plan at the next valuation (37% of those whose funding level had worsened). This might attract the Regulator's attention.
Investment issues
• Investment strategy is the key driver for clearing deficits – respondents cited “the amount of risk we are willing to take” as the most common determinant in how long it will take to reach their long term objectives
• The move out of equities continues, with money flowing towards alternative assets and Liability Driven Investment solutions. Respondents expect this general trend to continue, particularly for smaller and less well funded schemes.
• Despite risk being a key consideration, there is still a large variation in levels of interest rate and inflation hedging: 28% of schemes have hedged more than 80% of the risk, while 27% of schemes have hedging levels of less than 40%
• Currency risk has been a focus since the 2015 survey; we have seen a reduction of 12% in the number of schemes having no policy on currency hedging, and an increase of 18% in the number that have/will hedge overseas currency exposure at fair value levels.
John Belgrove, senior partner, Aon Hewitt, said: “This year’s Global Pension Risk Survey shows a clear continuation of the trends of diversification of asset classes and increasing allocations to alternative and illiquid investments instead of equities. Trustees and sponsors alike are becoming more nervous about their reliance on equities and are looking for alternative sources of return to help them achieve their long-term goals. There is an ever-increasing variety of investment funds available for pension schemes to choose from, and it is encouraging to see these being welcomed and used appropriately within portfolios.
“Another standout result in the survey is the movement towards de-risking; about half of respondents had increased their liability matching assets in the last 12 months. But what is perhaps surprising is that despite this increase in matching assets, the majority of schemes are still very exposed to potentially detrimental changes to interest rates and inflation. Only 42% of schemes have protection levels of 60% or higher - despite there being many ways that schemes can protect against this risk, regardless of their size.”
John Belgrove continued: “Over the last nine years, The Aon Global Pension Risk Survey has documented how pension trustee and sponsor concerns and objectives have evolved. Although the institutional landscape is often accused of moving slowly it is enlightening to look back and see just how far attitudes and actions have evolved over this timeframe.
“The usual pattern with new ideas goes from initial rejection to later consideration and then to subsequent adoption. In the past, that has included ideas such as hedging financial risks, diversifying to alternatives, considering liability management exercises and delegation to fiduciary services. These do take time to be adopted and to become core staples of pension fund management - but the direction is clear and consistent. Aon’s Global Pension Risk Survey now serves as a valuable document of just how much has changed for pension schemes’ appreciation of risk and the availability of tools and services to deal with the challenges.”
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