London: July 18, 2005 -- Careless implementation of a new European Directive could restrict the investment options available to UK pension funds and potentially cost these funds millions of pounds through lost investment opportunities.  According to Aon Consulting, a leading pensions, benefits and HR consulting firm, new restrictions being proposed in the draft Occupational Pension Schemes (investment) Regulations 2005 could stop pension funds investing in certain asset classes, which up to now the Government (following the Myners report) has been encouraging funds to consider.

Under the proposed changes included in the Directive, the options for occupational pension schemes to invest in derivatives could be restricted to alternatives that either contribute to a reduction of investment risks or else facilitate efficient portfolio management. 

According to NAPF, the average sized pension scheme amongst their members is £1 billion.  If the Directive is implemented in its proposed form, the new regulations could potentially mean that these funds could lose the ability to add in the region of 1.5% per annum if they overlaid all of their assets with an active currency mandate.  Assuming a conservative growth rate of 6% per annum in the assets this could amount to approximately £198m over 10 years in lost investment returns for each company.

By imposing these restrictions without clearly defining what is meant by “efficient portfolio management”, Aon predicts that lawyers will be unable to determinewhether many alternative asset classes, such as active currency management, breach the regulations or not.  If this occurs, a number of the investment options currently available to UK pension funds could be restricted, and cautious trustees are likely to be deterred from considering legitimate and effective investment options.

Marek Siwicki, Senior Investment Consultant with Aon Consulting, said: “The risk-reward trade off associated with many of the alternative asset classes can be very attractive to investors.  Whilst the risks associated with these assets need to be monitored and checked before investing, an investment consultant would not be recommending such an asset class strategy unless he is satisfied that the manager has proper risk management controls, including, diversification of the counterparty risk. 

“Given the poor funding position of many pension schemes, it is vital that trustees can look at all asset classes – including those deemed to be less traditional - to get the best return from their assets.  Having reviewed the draft Directive, Aon calls upon the Government to review these regulations to ensure that pension fund trustees are able to make the best risk-return decisions for their funds without fear of prosecution.”

Notes to Editors:

About Aon Consulting

Aon Consulting is a leading human capital consultancy, helping organisations of every size to attract and keep the employees they need. We advise on all aspects of employment, including health-related insurance and risk; employee compensation and pensions; human resource strategy planning; job design and change management; and staff assessment and legal issues.

Aon Consulting is a division of Aon, the UK's largest insurance broker and provider of risk management services and a major force in reinsurance and the UK human capital consulting market.  Aon Consulting Limited is authorised and regulated by the Financial Services Authority.

About Aon

Aon Corporation ( http://www.aon.com ) is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 47,000 employees working in Aon's 500 offices in more than 120 countries.  Backed by broad resources, industry knowledge and technical expertise, Aon professionals help a wide range of clients develop effective risk management and workforce productivity solutions.

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