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26 Jun 2017

UK pension schemes taking action to reduce risk

Defined benefit (DB) pension schemes in the UK are taking positive steps to reduce their level of risk in a variety of ways, according to risk, retirement and health products provider Aon.

The company´s Global Pension Risk Survey 2017, which included 185 UK pension trustees, pension managers and scheme sponsors, found a growing appetite for de-risking and an increasing range of actions being taken by UK schemes.

The proportion of frozen DB pension schemes is now over 50% and the take-up of liability management options has increased since the last survey in 2015, with a particularly notable rise in Flexible Retirement Offers (FROs) — transferring out rather than retiring with the DB scheme — with 22% of respondents having implemented one, up from 5% in 2015.

The survey showed that 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.

Schemes are continuing to move out of equities, 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.

Yet, despite risk being a key consideration, Aon also found considerable 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%.

John Belgrove, senior partner at 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.”

Matthew Arends, partner at Aon Hewitt, highlighted the fact that the majority of schemes have not yet implemented an Integrated Risk Management (IRM) plan with specific actions, despite The Pensions Regulator stating that “all schemes need to put contingency plans in place”.

“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,” Arends added.

Copyright © M2 Bespoke 2017

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