(April 17, 2013) — UK final salary pension schemes have a much better idea of their long term objectives today, but are taking longer to achieve them, according to research from consultants Aon Hewitt.
Just one in five of the 241 schemes which responded to Aon Hewitt’s survey – representing assets of around £300 billion- has the objective of achieving a buyout, with 64% of schemes saying they were aiming for “self-sufficiency”.
The smaller the size of the scheme, the more likely it was they were trying to achieve a buyout, the data found, with a third of those with £100 million or less putting it as their top priority.
For schemes with £1 billion or more in assets, the top priority for 53% of them was reaching self-sufficiency.
The report also found there was a great deal of confusion surrounding the phrase “self-sufficiency” – some referred to it as reaching their funding target, while others saw it as decreasing the amount they relied on contributions from their sponsor.
“It is clear that larger plans tend to have more sophisticated investment approaches, such as the use of derivative instruments,” the report said.
“This is not to say that smaller plans are inadequate or failing to address issues correctly, but rather they may not consider it necessary to take these steps. At some stage the objective of the sponsors of smaller plans is to buy out the plan with an insurance company – this means that there is less need to embrace sophistication and complexity within the plan.
“A large plan with a self-sufficiency target, however, is likely to resort to derivative strategies to match the asset and liability cashflows over many years.”
It’s also taking longer for schemes to achieve their goals. In 2008, when the arrival of new entrants such as Paternoster and Lucida shook up the quiet pensions buyout market, nearly half the plans surveyed said their objective was to reach a buy-out target within five years. Subsequent market corrections and increases in liabilities have “forced a far greater degree of realism”, the report said.
Today, the average term is 13 years, driven by the increased liabilities created by a low yielding environment.
Equities out, bonds in
Investment trends were also assessed, with 41% of UK pension schemes saying they expected to reduce their exposure to UK equities, and 28% planning a reduction in allocations to global equities throughout 2013.
Many schemes also signalled their intent to increase investment in corporate bonds, and a third said they would increase their exposure to alternatives. Some also said they intended to make more use of derivative strategies and active asset allocation, as they continued to seek growth from a more diversified asset pool.
Equity allocations in UK pension schemes have almost halved from nearly 80% to 40% in the past 12 years, while bond allocations have more than doubled from around 20% to over 40%.
John Belgrove, senior partner in Aon Hewitt’s investment consulting team, said: “The results of the survey provide more evidence of a structural shift in the UK pensions industry’s view of equities as the main source of portfolio growth. Despite an equity performance recovery of around 70% from the low point of 2009, pension schemes continue to display a desire to move away from the asset class.
“While equities will continue to play an important role in scheme portfolios, the focus for the future is on risk management through hedging and diversification. The ‘cult of the equity’ is history for defined benefit schemes.”
Related news: Beyond the Buyout Binary