Equity holdings are reduced but alternatives and illiquids are embraced
LONDON (23 September 2019) – Aon, (NYSE:AON) a leading global professional services firm providing a broad range of risk, retirement and health solutions, has said that results from the Global Pension Risk Survey 2019 show that over half of UK defined benefit (DB) pension schemes have reduced the level of equities in their investment strategy over the last two years, while diversification into alternative growth assets has increased as schemes sharpen their focus on their chosen endgame.
The 2019 edition of Aon’s Global Pension Risk Survey – which has run every two years for over a decade - charts the actions, plans and concerns of UK DB pension schemes. There were 170 respondents to the UK survey, representing schemes of a broad range of sizes from less than 500 members to over 10,000 members.
Emily McGuire, partner at Aon said:
“The overall themes in the survey of maturing pension schemes and reducing time to reach long-term targets are inevitably reflected in the way schemes have outlined their investment strategies. This 2019 survey demonstrates many of the trends we saw two years ago – notably de-risking and diversification. But this year the difference lies in the pace of change and the level of activity - schemes have firmed up their views and acted decisively.
“The way schemes have acted has been very much driven by their own circumstances but typically actions have fallen into two categories: schemes that have reduced equity exposure but increased liability hedging to reduce overall volatility, and those that have diversified from equities into alternative growth assets. We have also seen continuing interest in illiquid asset classes as schemes look to alternative investment ideas.”
Emily McGuire continued:
“Wind the clock back 10 years and equities were typically 50% of a scheme’s investment portfolio. That’s changed with allocations now far lower and with 40% of respondents expecting to reduce that figure further over the next year. Nevertheless, they still need to maintain investment returns in their portfolio, which is where the increased use of alternative growth assets comes in. We saw increased evidence of this in the survey with schemes indicating that they expect to increase their exposure to assets such as private credit - (47%), bulk annuities (33%), real estate (27%) and infrastructure (29%).”
The survey highlights a reduction in time for schemes reaching their long-term target and makes clear that most changes in schemes’ investment approaches are driven by their aims of de-risking in its different forms, with 35% schemes targeting buyout and 43% seeking self-sufficiency. In many cases, this is taking the form of increasing liability-driven investment (LDI), with 50% of schemes adding to their LDI portfolios over the last year – and making a big impact on risk reduction.
Emily McGuire said:
“We have long advocated pension schemes hedging their liability risks, so it’s pleasing to see in the survey that nearly 90% of schemes have hedged over 40% of their interest rate risk, and that 45% of respondents are now hedging over 80% of their interest rate risk (up from 30% in the 2017 survey).
“This change has meant that more and more schemes have insulated themselves from the fall in gilt yields that we have seen in recent times and the adverse impact it would have had on their funding levels. Instead, some of these schemes now have their endgame in sight.”
This year’s survey also asked schemes which elements of their investment strategy and implementation they had delegated or planned to delegate in the future. As in previous years, this is an area in which attitudes are evolving, with the number of schemes open to delegating manager selection and monitoring on the increase (almost two-thirds of schemes) and around a quarter of schemes now operating full fiduciary mandates. However, in this section of the survey, partial fiduciary management was the most popular response, with 30% of schemes already using it and an additional 20% considering it over the next 12 months.
Emily McGuire said:
“Life doesn’t get any easier for pension scheme trustees nor for sponsoring employers. There are more regulatory requirements and the range in complexity of options and the time required to agree solutions are not reducing either. It’s therefore maybe not surprising that we have seen a notable increase in activity over the months since the Competition and Markets Authority (CMA) review findings were published. The survey suggests - and we expect - that many more schemes will continue to assess the relative merits of fiduciary management as a way of implementing their investment strategies in the future.
“Along with this we, also expect to see the role of third-party evaluators and professional trustees in assisting in the decision-making process becoming more important and another area of focus for schemes.”
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Notes to Editors
Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.
Aon announced in May 2018 it will retire the business unit brands of Aon Benfield and Aon Risk Solutions, which follows the retirement of the Aon Hewitt business unit brand in 2017. This move was designed to increase the rate of innovation across the firm and make it easier for colleagues to work together to bring the best of Aon to clients. Aon has five specific global solution lines: Commercial Risk Solutions, Reinsurance Solutions, Retirement Solutions, Health Solutions and Data & Analytic Services.
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