Pension Funds Prefer (to Tackle) Assets

(February 25, 2013) — Many pension fund investors are steadfastly concentrating on managing their investment portfolio rather than tackle their liabilities, which are proving the bigger headache, a global survey has shown.

The triennial Global Risk Survey conducted by consulting firm Aon Hewitt, showed a “marked reluctance” by those managing pension funds to “participate in broader liability management exercises aimed at reducing long-term liabilities and accelerating flight plans”.

Globally, pension fund assets have largely grown in the aftermath of the financial crisis, but many schemes have found themselves underfunded due to changing metrics that affect their liabilities.

Economic factors and changes in policy have affected pensions’ funding levels, but those managing schemes could be doing better in controlling liabilities, the survey found.

There are two reasons behind the phenomenon, according to Paul McGlone, partner at Aon Hewitt in the UK. Firstly, trustees and investment committees understand asset management – including liability-driven investment and other de-risking measures – more readily; secondly managing liabilities has often been something the sponsoring company would look after.

“It is a lot harder to manage £100 million in liabilities than £100 million in investment,” said McGlone. “Investing £100 million might be done through one asset manager into one asset class, whereas £100 million in liabilities means looking at data, member information and dealing with the queries from scheme participants.”

Managing the liabilities could mean altering how members receive their benefits, for example issuing lump-sum payments at retirement or disconnecting regular payments from rising inflation, which would impact the sum required by the investment process.

“Only managing the investment process is only managing half the issue,” said McGlone. “Tackling liabilities means looking at much smaller parts of the process, but it can have a major impact. Some leading sponsoring companies and their pension fund managers are coming together to look at how to do it – but they do realise it is a difficult task.”

The survey also found that in the United Kingdom, pension fund recovery periods had been extended by those managing the schemes since 2009. The average recovery period has increased by one-and-a half-years to 12.8 years.