Poll Shows 'Wild Gyrations' Have Pushed UK Pensions to De-Risk

(February 14, 2011) — A poll of more than 200 UK schemes by consultant firm Aon Hewitt has shown that over the next decade de-risking strategies will spike.  

“Pension schemes have been through some wild gyrations from deficit to surplus over the past 20 years,” said Kevin Wesbroom, Aon Hewitt UK’s head of global risk services, in a statement. “There is a sense from the 2011 survey results that we are now entering an era when schemes will be focused on slowly taking risk off the table…There is no silver bullet to de-risk a pension scheme – it is going to be a hard grind and not the sprint to the finishing line that many might have hoped for.”

The consultant’s Global Pension Risk Survey 2011 found 69% of respondents said their longer term objective is to take less, or no risk in the future. Furthermore, the survey found that over the next two years, despite having the goal of being self-sufficient in the long-term, almost 80% of schemes are seeking additional company contributions.

Paul McGlone, Aon Hewitt UK benefits head of global risk services, indicated in the report that the consultancy is now witnessing a separation between large and small schemes, with bigger pensions having a more robust base to consider some of the more innovative options, such as contingent funding approaches and longevity swaps. While bigger schemes will aim to de-risk by becoming self-sufficient without relying on sponsors for benefits payments, smaller schemes will take risk off the table by buying out the benefits from an insurance company, according to the report.

In terms of investments, pensions are expected to move away from equities — with particular attention to property, hedge funds, commodities, currency and infrastructure –and will instead attempt to harness liability-driven investing strategies by increasing exposure to bonds, for example.

In its fifth bi-annual Pension Funds Asset Allocation Survey compiled from studying 50 institutional investors representing nearly $205 billion of assets, financial services consultant firm bfinance said it expected infrastructure and private equity to increase 14% and 10% respectively over the past six months. According to the research, 29% of schemes plan to reduce their equity holdings in the next three years, while only 14% plan to increase their weighting.

The findings from bfinance’s recent study support a shift in sentiment by pension funds, as they are seeking to diversify away from core asset classes and into property and alternatives, with infrastructure attracting the most popularity. In an interview with CFA Institute magazine, the world’s largest sovereign wealth fund, the Abu Dhabi Investment Authority (ADIA), said it continues to focus on infrastructure assets for its long-term stable yields. Similarly, earlier this month, in an effort to locate stable long-term investment vehicles with decent yields, the Alberta Investment Management Corporation (AIMCo) agreed to buy a 50% stake in Autopista Central, a motorway in Santiago, Chile.