UK Pension Funding Gap Widens

Aon Hewitt report shows that funding for the top 5% of pensions plans has risen, while funding for the bottom 5% has fallen.

The funding levels of Britain’s pension plans continue to widen between the haves and have-nots, as research from insurance firm Aon Hewitt shows that the top 5% of UK pensions plans have seen their funding levels rise, while the bottom 5% have seen their funding fall.

Aon’s most recent Global Pension Risk Survey for 2017 shows that although the median pension plan in the UK has seen a 2% increase in funding level over the year, there has been a divergence among UK plans’ funding levels: The top 5% have seen increases in funding level of more than 9%, while the bottom 5% of have seen their funding levels fall by more than 5%. 

To understand how pension plans reacted to change and what plans they have for the future, Aon surveyed 185 plans covering nearly 4.5 million members and £500 billion of assets. More than half the survey responses came from trustees, including independent trustees. The majority of the remaining responses came from pensions managers (17%) and scheme sponsors (11%). The survey found that the plans have taken “significant action,” ranging from hedging instruments and alternative financing options, to additional pension options for members.

“Long-term objectives are an increasingly large focal point for schemes,” said the report, “with the vast majority of schemes targeting either buy-out, self-sufficiency, or other low-risk positions.”

The survey found that among long-term funding objectives by plans of different sizes, the buyout option is most popular among smaller plans (39%), but it also found that the buyout option has become more applicable for larger plans. In 2015, the last time Aon released its Global Pension Risk Survey, only 8% of plans over £1 billion schemes were targeting buyouts, but this has risen to 19% in the 2017 survey.

“The two years since our last Global Pension Risk Survey have been challenging for UK defined benefit (DB) schemes,” said the report. “This period has been characterized by sustained low-gilt yields and political volatility (such as the EU referendum) which has spilled over into investment markets.”

When asked what key factors will influence them as to when they will reach their long-term objective, three key themes stood out among respondents: the amount of risk they are willing to take (37%), the level of long-term interest rates (27%), and the employer’s ability to make contributions (23%).

Aon said that one noticeable change since 2015 is the fall in the proportion of respondents for whom the level of corporate bond yields is the most important factor. In 2015, 21% of respondents cited this as the most important factor, but only 4% felt the same way two years later, “highlighting the ever-increasing disconnect between funding and accounting liability measures,” said the report.

“The results also show a continuing appetite to increase the use of active asset allocations and structured products in portfolios,” said the report. “This implies that trustees are continuing to look for return in risk-controlled ways, and are not shying away from the increased complexity and governance burden.”

When analyzing the monitoring of pension risks by plan size, Aon found that the larger pension plans tend to monitor asset values more frequently than their smaller counterparts. For example, the survey found that 10% of smaller plans monitored asset values annually or less frequently, while all respondents representing larger plans monitored asset values more frequently. The scenario is similar with the monitoring of liability values, with an even more significant difference between large or medium plans and smaller ones.

“We found that schemes have taken significant action in all these areas, ranging from hedging instruments through alternative financing options and into additional pension options for members,” said the report. “It is clear that schemes also plan to do significantly more in the near future to continue to succeed in the challenging environment in which DB schemes operate.”


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