London: 14 September 2005 - UK pension plan managers are becoming more risk averse than their US counterparts when it comes to investing in equities.  This is according to new analysis¹ by Aon Consulting, which highlights that UK pension plans now have a lower proportion of funds invested in equities than US pension funds currently have.

Aon’s analysis² shows that the proportion of UK pension plan assets invested in equities has been steadily dropping from 60% in 2002 to 58% as at 2004.  In comparison, there is a rising trend towards increased pension funds investment in equities markets in the US where 62% of pension fund assets are currently invested in equities, up from 59% in 2002.

Commenting on this finding, Andrew Claringbold of Aon Consulting UK, said: “Despite two good years of equity returns in the UK, the proportion of UK pension funds invested in equities has declined.  This seems to have been driven by Trustees as a reaction to the slowly increasing proportion of pensioners within their plans.  However, we are also finding that some UK companies are becoming increasingly aware of the fact that high exposure to equities brings with it a significant level of risk and therefore this may increase the trend away from equity investment in the future. "

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The research found that on average, pension fund assets for UK companies are around 27% (2004) of the market capitalisation of the company – unchanged since 2003.  In the US, companies generally have pension plan assets of around 16% (2004) of the market capitalisation of the company.  Aon’s analysis shows that a 25% fall in the present level of pension fund assets would, in theory, impact on the share price of UK companies by 7% and on the share price of US companies by 4%.

Andrew Claringbold added: “Companies with pension plan assets that are less than a quarter of their market capitalisation are not significantly exposed to investment risk in their pension plan and are therefore more likely to look at an investment strategy that is geared towards having a higher proportion of equities.  In the UK around 10% of companies have pension plans that are larger than the market capitalisation of the company and these companies are very exposed to investment risk.  In these situations, companies need to consider investing in assets that are more closely aligned with a pension plan's liabilities, to effectively offset those risks."

Brad Klinck from Aon Consulting in the US added: "The percentage of pension plans' equity investments vary by country for two primary reasons: pension rules (funding, accounting, etc.) vary significantly by country and beliefs regarding expected equity returns also vary by country.  Except in a few well-publicised cases that represent outliers, recent changes to UK accounting have not generated the ”flight from equity" response among plan sponsors and trustees that many feared, and this may mean that a similar US change in accounting may be less problematic than many have suggested.  Ultimately, US employers have made significant equity investments in their pension plans because of the excess returns these investments have garnered when compared to other asset classes."

Notes to Editors:

1. The research is divided into two parts:
   
   a.        The UK research looks at the disclosure of pension information of 200 of the largest UK companies – including all UK FTSE 100 companies with DB plans; a significant proportion of companies from the FTSE 250 with DB plans, and; the remaining number of companies were listed with the NAPF, as having pension fund assets in excess of 100m.
   
   b.       The US research looks at disclosure of pension information of 80 Fortune 100 companies sponsoring defined benefit pension plans for which information was available in company annual reports.
   
2. The Aon Consulting research compares pension information data for US companies (using FAS87 accounting rules) with similar data for UK companies (using FRS17 accounting rules).  Assets are measured on a market value basis in both countries. While FAS 87 allows the use of a "smoothed" asset value for purposes of calculating the annual pension expense, we used market value in all calculations.  Liabilities are measured using the projected unit credit method with a discount rate based on current high-quality corporate bonds in both countries. Therefore, in theory the liabilities are comparable between the countries.

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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