United Kingdom

Aon’s Global Pension Risk Survey sees rise in derisking-focused investment strategies

LONDON, 10 December 2021Aon plc (NYSE: AON), a leading global professional services firm, has found that UK defined benefit (DB) pension schemes are continuing to derisk their investment approach. Results from Aon’s Global Pension Risk Survey 2021/22 show that improving funding levels have also driven schemes to switch to less risky asset classes, such as Liability-Driven Investment (LDI) and credit, and to increase their hedging ratios.

Aon’s Global Pension Risk Survey – which the firm has conducted every two years for over a decade – charts the actions, plans and concerns of UK DB pension schemes. There were 137 respondents to the UK survey, representing schemes with fewer than 500 members to over 10,000 members.

The survey showed that the funding level of 75 percent of schemes is now higher than before the COVID-19 pandemic. Accordingly, schemes have reduced risk in their investment portfolios, with more than half (51 percent) saying that they expect to lower their equity exposure over the next year. Another 34 percent expect to increase their use of credit, and 37 percent expect to allocate more to LDI strategies.

These responses are in the context of 63 percent of respondents stating that they will depend on asset performance to reach their long-term goal. In an environment where most assets are at or near all-time highs, finding the right balance between risk and return will be critical.

Calum Mackenzie, partner at Aon, said:

“Since the initial market reaction to COVID-19, pension scheme funding levels have recovered and many schemes are in a better place than at the start of 2020. As an unprecedented number of schemes are seeking buyout, it is no surprise that they are also adjusting their investment strategies in line with that.

“More than 50 percent of respondents have reduced their equity allocation over the last two years and we expect this trend to continue. We have not only seen schemes offsetting exposure to equities with credit purchases, but also an increase in interest rate hedging – 74 percent of respondents now have interest rate hedges in excess of 80 percent of their assets. This was true of only 43 percent of respondents two years ago.”

An increased focus on ESG

Calum Mackenzie continued:

“The megatrend shaping the investment landscape is the focus on Environmental, Social and Governance (ESG) factors, and, in particular, climate-related risks. An encouraging 92 percent of survey respondents said that they have considered their ESG policy. We see this to be a result of the increasing awareness of both regulatory shifts and the impact of climate change as schemes navigate this form of volatility.

“But schemes are also supporting ESG considerations with action – a fifth of schemes have already made changes to their investments, having reviewed their ESG policies over the last two years. These steps have often involved moving to ESG benchmarks, screening out poor ESG holdings and focusing investment on assets that will make a positive impact on society.

“We believe that this is a trend that will continue, as 85 percent of respondents have either already reviewed or will review climate change risks in the next two years. They will look beyond the physical risks and be proactive, assessing how financial gains can be sought from the transition towards a lower carbon environment.”

Metrics in place to measure progress

Two-thirds of survey respondents have or are likely to consider carbon metrics and targets, both in making investment decisions and in reducing their own climate footprint.

Calum Mackenzie said:

“As climate risk becomes an integral part of investment decision-making, we expect investors to introduce measures to help them make better decisions and gain a greater understanding of the impact of their portfolio. That should inform accurate targets and timelines – both internal and regulatory.”

The role of illiquid assets when approaching buyout

Despite 65 percent of respondents stating they will achieve their long-term objective within 10 years - which for 47 percent of schemes is buyout - illiquid assets are still popular among pension schemes. This is important when considered against the policy objective to ”build back better”.

Calum Mackenzie said:

“We are seeing schemes protect themselves from inflation and volatile market movements by opting for illiquid assets such as infrastructure (34 percent) and real estate (32 percent). Energy transition funds are also popular in this space. This makes it clear that pension schemes can certainly play a big role in the drive towards building an economic infrastructure for the future.”


For more information, Aon’s Global Pension Risk Survey 2021/22 is available here.

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