Choice of endgame options becoming more distinct
LONDON (9 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 UK defined benefit (DB) pension schemes now have real clarity on their long-term targets, with the two outcomes of buyout or a strong form of self-sufficiency dominating.
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. Its first chapter, released today, focuses on schemes' long-term funding and investment targets.
Matthew Arends, head of UK Retirement Policy for Aon and leader of the Global Pension Risk Survey, said:
"This year’s survey makes it clear that not only do almost all DB schemes (92%) now have a long-term target but that they are also very firmly focused on one of two outcomes. Over three-quarters of schemes said their target was either buyout or a strong form of self-sufficiency, meaning a low risk future – and with very low likelihood of needing further contributions from the scheme sponsor.
"It’s also evident that we have seen a steep increase since our last survey in 2017 in the proportion of schemes with buyout as a target (27% to 35%). Over the last two years, schemes have seen bulk annuity transactions of all sizes becoming a market norm and this is inevitably motivating many to consider this as a real possibility for themselves.
"However, a strong-form self-sufficiency remains the most popular target, with 43% of respondents selecting that option.
Matthew Arends continued:
"We asked schemes what target they were aiming for, but we also asked them when they expected to reach it – however it was defined. The responses to this question were very telling, with the average timescale reduced from 11.1 years in 2017 to 9.4 years in 2019. Two-thirds of respondents expected to reach their target within the next 10 years.
"These results really underline both the increasing maturity of DB schemes and reflect the continuing trend of reducing timescales for reaching targets that we have seen in this survey since 2013. In fact, the pace of maturing is accelerating: the reduction in timescales between the 2017 and 2019 of 1.7 years is almost twice the equivalent reduction over the previous two years.”
This year’s survey also asked pension schemes how they expected to reach their targets. In most cases, schemes expected to take a range of actions. The single most common answer at 78% was to rely on asset returns, followed by liability management (51%) and contributions beyond the recovery plan (46%).
Matthew Arends said:
"This set of results reveals much about the underlying views and approaches of schemes. Relying on asset returns clearly has its attractions, although as schemes de-risk the potential for higher returns will reduce.
"But the high score for liability management underlines just how embedded and understood all the different kinds of liability management and member options now are within UK pensions. A separate chapter in the Survey to be published in the Autumn will cover liability management in more detail.
"We were also surprised by the high score for additional contributions. These would be contributions that the scheme sponsor has not yet committed to under the recovery plan. It made us wonder how willing sponsors would be to use this option to bridge the gap to the long-term target and it underlines the need for early conversations between trustees and company to agree the long-term target and how it will be reached."
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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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