The Zone framework fosters a new way of thinking that aligns with the changing landscape of the defined benefit (DB) industry, ensuring that the specific needs of each scheme are effectively addressed.
The defined benefit industry is entering a new era. With many schemes now better funded, discussions have expanded, and priorities have shifted compared to only a few years ago.
That’s why Aon has developed its Zone Framework for investors. Shelley Fryer, associate partner at Aon, and Daniel Peters, head of investment strategy, discussed this topic further, explaining what the Framework entails and how it can benefit schemes and members alike.
What is the Zone Framework?
The Zone Framework represents a change in approach in how Aon works with its clients to develop their investment strategy. It has been designed to help them clearly articulate their strategic priorities, which are increasingly different to what they have been in the past. Aon then works with its clients to build a strategy and develop a monitoring process that aligns with those priorities.
“The new pensions landscape is calling for a different mindset when thinking about strategy. The Zone Framework supports a different way of thinking about strategic decisions, recognising that not everyone is solely focussed on reaching their next funding target anymore, but the right investment strategy is still key to meeting their goals,” said Fryer.
The Framework is made up of three zones: the ‘Growth Zone’, ‘Protection Zone’ and ‘Endgame Zone’. Each zone has a specific high-level priority, acknowledging that investors may have a range of priorities that can shift over time or due to a change in circumstances.
In the ‘Growth Zone’, the focus is on generating returns; in the ‘Protection Zone’, the priority is to protect and steadily improve the funding level; and in the ‘Endgame Zone’, executing the endgame strategy is prioritised.
In addition, there is an overarching framework that applies to each zone. This stands for ‘Identify your Zone’, ‘Optimise your strategy’, ‘Navigate opportunities’ and ‘Evaluate.’
Why is it Needed?
This new framework better reflects the industry's current position and supports schemes in their response to it. In the past, most schemes operated with a deficit, so their investment strategy centred around generating the return needed to close that deficit to establish a de-risking plan.
During this time, many clients focused on embarking on a journey toward becoming fully funded as quickly, safely and cost-effectively as possible.
Whereas now many schemes have reached their original funding targets. Therefore, they are no longer asking how to get there. This shift, combined with an increase in available options for fully funded schemes, such as consolidators and run-on, has prompted more clients to reconsider their next steps.
Fryer noted that during the development of the framework, Aon had a lot of clients who had achieved full funding but were not eager to rush into buyout, start paying out surplus or look at run- on. Instead, they preferred to maintain their comfortable, fully funded status.
“What you need from your investment strategy is quite different in that case, than if you're trying to reach a target or you're trying to achieve risk transfer,” she said.
Therefore, the Zone Framework ensures that the distinct needs of each client are met. By doing so, it not only benefits the schemes themselves but also helps to improve outcomes for their members.
Benefits For All
For investors, the Zone Framework helps them to understand what specific ‘zone’ they are in. As a result, they can set priorities for their investment decisions and strategies while they occupy that zone and understand and monitor what might trigger them to change zone, so they are prepared.
Identifying their zone also allows clients to optimise their asset allocation. For many in the Protection Zone, this means focussing their analysis and monitoring process on their key risk; the reappearance of a deficit. By doing this, many clients are finding that portfolio efficiency remains an important consideration and analysis of return targets is paramount to avoid “de-returning” rather than de-risking.
For members of the funds, this framework will enable a better balance of risk and to ensure that their members are secure.
The Future of the Zone Framework
Through the Zone Framework, Aon is at the forefront of adapting thinking in response to the change in environment. Engaging in conversations with clients and understanding their specific needs in this evolving environment was instrumental in the development of the Framework. It is expected to evolve over time in response to client needs.
