From the blog: Defined benefit pension schemes are showing greater sophistication in their approaches to risk and improving their funding levels, but the challenging wider economic environment is hampering efforts.
Consultancy Aon Hewitt's latest 'Global Pension Risk Survey' has shown schemes have put greater focus on objectives and shifted away from risky assets, but low gilt yields have pushed up the cost of future liabilities and slowed progress towards funding objectives.
Consultancy Aon Hewitt's 'Global Pension Risk Survey' has shown schemes have put greater focus on objectives and shifted away from risky assets, but low gilt yields have pushed up the cost of future liabilities and slowed progress towards funding objectives
The survey had a total of 250 UK respondents, accounting for 220 schemes and half a trillion pounds in assets.
Scheme sizes varied widely, with 30 per cent of respondents coming from schemes with more than 10,000 members, and 22 per cent from schemes with fewer than 500.
To set the tone, the report contains a chart (see below) showing the slide in gilt yields over the past six years – and it's not a pretty picture.
It says: "The range of tools that sponsors and trustees have at their disposal has never been greater, but the challenges and uncertainties they face remain sizable."
A symptom of this challenging environment is that while schemes are adapting, they are not necessarily getting any closer to their goals.
Schemes are becoming more savvy...
As the chart above shows, schemes are increasingly grasping the need to have a long-term objective in place.
The real surprise here is how few had a long-term objective in 2009.
It is also encouraging to see the lesson has not been lost on smaller schemes, with the largest and smallest schemes recognising the need for a long-term objective – though the chart below shows there was considerable difference on what that objective should be.
Despite this, the challenging economic environment in which schemes are operating has limited their success here, with funding objectives seemingly not getting much closer.
Diversification, dynamism, derisking
An increased awareness of risk and broader funding objectives have driven a longer-term shift away from equities in favour of liability-matching assets and alternatives.
As the two charts directly above show, many respondents were looking to increase their holdings of index-linked and fixed interest gilts.
This is likely largely due to the fact gilts are a sure way to match liabilities, meaning demand remains high even as prices rise, though it could also be read as a signal things will get worse before they get better.
