LONDON, 26 March 2007 – Almost a third of pension funds (30%) reallocated over 5% of their investment portfolio during 2006 as the impact of scheme closures and increased maturity affected investment strategy. This is according to research released today by Aon Consulting, a leading pension, benefits and HR consulting firm.
However, increased volatility in markets over 2006 and the continued focus on bond yields has meant that the priority for many UK defined benefit scheme sponsoring employers has not just been about assets but on how those assets relate to scheme liabilities. Aon Consulting’s research highlights the way in which employers and trustees have pursued more diverse and risk-controlled investment strategies.
According to the research, 14% of pension funds have invested to diversify their growth assets over the past year, with the intention of being less exposed to a single volatile asset class. This builds on investments by funds into such assets made in earlier years. The greatest shift in 2006 was the continued return to favour of the property sector with 50% of schemes diversifying growth assets using property. However, absolute return vehicles such as hedge funds (17%) and global tactical asset allocation (11%) are also becoming popular forms of growth investments.
Paul McGlone, principal and senior actuary at Aon Consulting, said:“The improved investment returns achieved by most schemes in recent years is going some way to alleviating the rising deficit levels experienced by almost all pension funds during the last decade. However, while most trustees and employers still believe that equity returns should outperform other asset classes over the long term, many find themselves in a shorter term game. For those not wanting to give up long term return, diversified growth assets offer one option. Interest in wider asset classes has accelerated and is expected to build on this over the next 12 months.”
The use of other strategies to reduce risk is also continuing to grow. Over a tenth (11%) of employers indicated that their schemes have adopted some form of Liability Driven Investment (LDI) strategy in the past 12 months, to enable their scheme to better match movements in assets and liabilities. The change expected to have the biggest potential impact in 2007 is the increased use of contingent assets for scheme funding. A sixth (17%) of schemes in the survey are already using such assets in their portfolios, with another 20% considering such assets. Parent companies and/or group guarantees are the most popular form of contingent funding being implemented (17%) or considered (20%), with escrow accounts (1% / 19%), charge over assets (2% / 14%) and letters of credit (2% / 12%) being the next most popular considerations.
McGlone continued:“The implementation of LDI strategies remains somewhat limited, with a key factor being the perceived cost of such a strategy. In the meantime, the use of contingent assets is growing quickly. While such assets do not generally remove risk from the employer, they can help to manage the volatility, and should make trustees more relaxed about any short term investment underperformance. They can also free capital to be invested directly in the business rather than the pension fund, which will hopefully pave the way for a more integrated approach to funding and investment across the business, to the benefit of all stakeholders.”
Notes to editors:
-
The research surveyed 150 UK companies operating defined benefit pension schemes between November 2006 and February 2007.
Of the companies surveyed:
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, one of the UK’s largest insurance brokers and providers 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 is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 43,000 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.
This press release contains certain statements related to future results, or states our intentions, beliefs and expectations or predictions for the future which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from either historical or anticipated results depending on a variety of factors. Potential factors that could impact results include: general economic conditions in different countries in which we do business around the world, changes in global equity and fixed income markets that could affect the return on invested assets, fluctuations in exchange and interest rates that could influence revenue and expense, rating agency actions that could affect our ability to borrow funds, funding of our various pension plans, changes in the competitive environment, our ability to implement restructuring initiatives and other initiatives intended to yield cost savings, our ability to execute the stock repurchase program, our ability to obtain regulatory or legislative changes to permit continuous sales of our supplemental Medicare health product, changes in commercial property and casualty markets and commercial premium rates that could impact revenues, changes in revenues and earnings due to the elimination of contingent commissions, other uncertainties surrounding a new compensation model, the impact of investigations brought by state attorneys general, state insurance regulators, federal prosecutors, and federal regulators, the impact of class actions and individual lawsuits including client class actions, securities class actions, derivative actions, ERISA class actions, the impact of the analysis of practices relating to stock options, the cost of resolution of other contingent liabilities and loss contingencies, and the difference in ultimate paid claims in our underwriting companies from actuarial estimates. Further information concerning the Company and its business, including factors that potentially could materially affect the Company’s financial results, is contained in the Company’s filings with the Securities and Exchange Commission.
Aon Limited is authorised and regulated by the Financial Services Authority in respect of insurance mediation activities only
Contact Info
