LONDON, 16 November 2006 – U.S. pension plan managers have been more aggressive than their U.K. counterparts when it comes to investing in equities according to new research released today by Aon Consulting, a leading pensions, benefits and HR consultancy. 

The research found that 62 percent of pension plan assets for U.S. Fortune 100 companies were invested in equities at the end of 2005, compared to 58 percent of the 200 largest pension plans (including all those in the FTSE 100) in the U.K.  The level of investment in equities is similar to the total proportion of pension plan assets invested in equities in 2004, when the U.S. and U.K. were at 62 percent and 59 percent, respectively. 

However, according to Aon these total figures disguise a trend in the U.K.  With stock markets performing well relative to most other markets in 2005, the total proportion of equities in pension plans would have been expected to increase (all things being equal).  However, in the U.K., this has been offset by 12 percent of companies in this analysis reducing their allocation to equities by more than 5 percent.  Nearly all of these switches were from equities to bonds.

“Historically, many U.K. pension funds have had a very high exposure to equities and it makes sense to consider whether this is still appropriate,” said Andrew Claringbold, principal at Aon Consulting U.K.  “Increasing the exposure to bonds is obviously one way of reducing risk, albeit with a lower expected return.  However, there are also opportunities for pension plans to invest in other assets with similar return expectations to equities, but with different risks such as properties or hedge funds.”

Jim Scott, senior vice president with Aon Consulting, continued: "Our data indicates that the average U.S. pension plan exposure to equities – net of the impact of market movements – has remained relatively stable over the last few years, suggesting plan sponsor risk tolerance has not changed much despite the market downturn of 2001 and 2002.  However, the allocation to traditional domestic equity has reduced modestly in favour of international equities, alternatives and real estate, as sponsors seek higher returns and better diversification.”

Aon Consulting also analysed the impact pension plans have on company balance sheets in the U.S. and U.K.  For U.S. companies analysed, overall pension plan assets are, on average, approximately 15 percent of the market capitalisation of the company, which is comparable to 16 percent in 2005.  However, this is less than U.K. companies analysed, where the overall pension plan assets are, on average, about 23 percent of the market capitalisation, down 1 percent from the end of 2005.  When combined with the somewhat lower allocation to equities, this shows U.K. companies were exposed to slightly less pension plan risk during the last year. 

Claringbold added: “After several volatile years in the equity markets, many companies on both sides of the Atlantic seem to be taking a much more conservative approach to managing their pension investments in order to reduce their exposure to risk.  However, whilst most companies are managing their exposure to risk, 10% of companies in the UK and 5% in the US have pension schemes that are larger than their market capitalisation, leaving these companies exposed to a high degree of investment risk in the pension scheme.”

"The U.S. market has been anticipating pension reform for some time and it finally happened this year,” said Scott.  “It will be interesting to see if sponsors will now begin to change the allocation of assets more in favour of fixed income in order to better match liabilities with assets, but at the expense of higher expected returns."

Notes to editor:

About Aon

Aon Corporation is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 46,000 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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