UK Defined Benefit Schemes Aim to Cut Risk Within Five Years

Research by Towers Watson has found that a majority of corporate executives running DB schemes say they would use sophisticated financial products to reduce their risk.

(November 29, 2010) — Defined benefit schemes are paying greater attention to derisking, according to research compiled by consultant Towers Watson.

The firm’s 2010 Pension Risk Management Survey showed that nearly 75% of final salary scheme sponsors will slash investment risk over the next five years. A total of 61% said they currently use currency forwards to limit risk and more than half (51%) said they use interest-rate swaps to reduce risks to their DB schemes.

The research revealed that underfunding was an issue with 40% of the 100 large companies surveyed, most with pension funds worth over £660 million. To better align assets with liabilities, the survey showed a greater move toward achieving this through liability-driven investment, insurance solutions and liability transfer, liability redesign, and investment governance improvement.

Just 17% of pensions placed a greater focus on achieving higher returns than cutting risk.

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