Aon Hewitt survey finds schemes long-term goals have drifted by further 5 years

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Pension funds should be preparing to improve funding levels as a surge of derisking opportunities flood the market over the next few years, a new survey has found.

Aon Hewitts’s survey of over 220 UK plans with combined membership of more than three million people, and representing about £300bn of assets, found that since the 2009 survey, pension schemes have seen their average proposed timescale for reaching their long-term objective increase by around one and a half years.

Aon Hewitt Global Risk Services partner Kevin Wesbroom said: “As liability levels have continued to rise, many pension schemes have been treading water and drifted further away from their long-term targets. Trustees need to prepare to take action for when funding levels improve so that their schemes are not left out at sea as a surge of derisking opportunities and liability management activity floods the market.”

Wesbroom continued: “The vast majority of schemes now have long-term targets in place - typically buy-out or self-sufficiency. However, the survey shows that schemes have moved further away from reaching those goals over the past four years. In the 2009 survey they were hoping, on average, to reach their target in 2020 but in the 2013 survey that deadline has drifted out to 2025. This is as a result of spiralling liabilities, driven in the majority of cases by the historically low levels of yields on government bonds.

Wesbroom said schemes needed to ensure they are prepared to take short-term action ahead of a feasible period of benign asset markets and a reduction in liabilities on the back of rising interest rates.

Other key findings of the survey include:

  • Ninety per cent of schemes now have a long-term objective, compared to merely 60% in 2009. The long-term objectives of schemes are typically expressed as buyout (particularly for smaller schemes) or self-sufficiency/low risk. The concept of self sufficiency is not well defined, and schemes should work through their own analysis, including long-term investment portfolio, residual risks reliance on sponsor etc.
  • The average timescale to reaching long-term objectives has increased from 11.3 years in 2009 to 12.8 years in 2013. Forty-four per cent of the respondents have frozen their plans as part of initial liability management efforts (up from 21% in the 2009 survey).

“So far, derisking has focused mainly on the asset side of the balance sheet but, in order to reach their longer-term objectives, pension schemes now need to start concentrating on managing their long-term liabilities as well. To date, schemes have been slow to take action on the liability side but we expect to see activity in this area increase, particularly with regard to pension increase exchange exercises at retirement,” Wesbroom added.

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