Hewitt Publishes UK Findings of its 2009 Global Pension Risk Survey
03 December 2009
Hewitt Associates, a global human resources consulting and outsourcing company, has published the UK findings of its Global Pension Risk Survey 2009. The survey shows how companies, trustees and pension scheme managers are managing their pension risk and underlines how UK corporate pension schemes have seen a seismic shift over the past 12 months. The global survey of over 400 pension scheme managers, trustees and sponsors from around the world incorporates data from 114 UK responses.
The UK findings reveal a surge in action — actual or expected — in comparison to Hewitt's 2008 survey, when respondents recognised the importance of pension risk but appeared to be reluctant to act. The 2009 survey, conducted after the impact of the credit crunch and amid soaring liabilities and extreme investment volatility, shows sponsors are now much more prepared or willing to take active steps to reduce their overall pension risk. For some, this has meant implementing tough measures, such as scheme closure.
Key findings of the survey include:
- Three-quarters of plans said they were more likely to consider freezing their defined benefit schemes to existing members
- A quarter of schemes had taken or were considering action under three or more headings for benefit changes — such as revised designs, caps on pensionable salary, enhanced transfers, reduced discretionary benefits, pension increase conversion exercises, etc.
- 60% of respondents are now more likely to consider hedging longevity risk via longevity swaps — but with two thirds of these continuing to run market risks elsewhere
- Most schemes (four out of five) expected additional contributions at their next funding review — in one in six cases the extra contributions were expected to have a significant impact on the sponsor's business
- Interest in the delegation of investment policy has trebled in the last 12 months
- Significant increase in the use of 'trigger points' to take risk (interest rate risk, inflation risk, etc.) off the table at pre-determined points, but from a low base
- More regular monitoring of key risks — liability risk, asset risk and covenant risk — over 50% now monitor covenant on a formal basis
Kevin Wesbroom, head of global risk services for Hewitt Associates in the UK, said: "Sponsors and trustees face a war on two fronts from the themes that have emerged in the past 18 months: velocity and volume. The sheer pace of change has been overwhelming, with markets moving at unprecedented rates for both assets and liabilities and on a daily basis at levels which historically were seen on a weekly or monthly basis."
Members' benefits
Limiting a scheme's liabilities by controlling the benefits it pays looks set to be a key priority for companies and trustees during 2010 and beyond. One way of achieving this is by closing the defined benefit (DB) scheme to new members. While around 20% of respondents have already done this, compared to 12% in 2008, 70% of replies said they saw this as more likely than before. The prospects for open, private-sector DB plans look bleak: only 2% of respondents predicted that their DB scheme will remain open to new entrants.
Yet the outlook is not entirely negative. The 2009 survey shows that UK pension schemes are considering a broader range of alternatives to closure, with one-quarter considering at least three different courses of action — such as capping pensionable salaries, removing discretionary benefits, enhanced transfers, or pension-conversion exercises. It builds on Hewitt's research throughout the year, which revealed that while closure may well be under active consideration many sponsors are actively considering a much broader range of additional options to manage their risk and meet their funding targets.
A new market for longevity
The continuing improvement in members' life expectancy is bad news for sponsors committed to paying their pensions. Hewitt's research shows that as a result of increases in longevity, UK pension liabilities are increasing at the rate of £1 million per hour. Therefore, it is hardly surprising that responses to the 2009 Global Pension Risk Survey show an enormous interest in the emerging solutions to tackle this issue.
In the past year, the first longevity swaps were executed in the UK market and Hewitt's survey showed that many are intrigued by this option: over 60% of respondents say they are actively considering hedging their longevity risk, most likely via the new longevity swap market. With the buyout market temporarily stalled as prices drift out of range for schemes with their reduced asset base, dealing with longevity risk could be one of the biggest activities during 2010. The survey suggest that two-thirds of those interested in dealing with longevity risk expected to continue to take other rewarded risks elsewhere — usually to help fill their pensions deficit.
Road to recovery
Scheme funding has become a key concern for trustees and companies alike with deficits plunging to record lows in March 2009. For companies whose triennial funding valuations coincided with this low point, dealing with the increased deficit could be a very painful process. Four out of five respondents expected increased contributions from their next funding review, and one in six said the extra contributions would be likely to have a significant impact on the finances of the sponsor.
Despite a more consensual approach emerging, over one-third of respondents believe recent events will make relations between sponsors and trustees more strained going forward.
Diversification, LDI and delegation
Extensive exposure to the equity markets has meant that extreme market volatility has caused significant mark to market problems for pension schemes and their sponsors' balance sheets. With investment prices falling and liabilities growing, trustees are faced with the need to respond with an investment strategy that can both drive for return but offer improved stability during periods of stress. Hewitt's survey revealed two dominant themes emerging, building on those identified in the 2008 survey.
In seeking to reduce their reliance on equity returns there is evidently a greater diversification of return seeking portfolios with more emphasis on alternative asset categories such as property, commodities, currency, infrastructure and hedge funds. Moreover, as pension funds have recognised the need for greater diversification, trustees have started to recognise the potential benefits of delegating various aspects of the investment process.
One of the biggest changes of attitude found in the 2009 survey related to attitudes towards the delegation of investment decisions: there is an increased willingness to consider delegating all, or part, of the investment process to outside professional agencies. While trustees continue to own the control of most aspects of the investment process, the survey revealed a moderate increase from 2008 in use of professional implementation, particularly in new asset categories. What was most striking was that trustees actively considering greater use of delegation had nearly trebled over the year, from around 12% to 35%.
Hedging
Market turbulence has also been instrumental in progressing attitudes towards the use of hedging instruments over the past 18 months. The Hewitt survey found that the number of respondents stating they have no policy for dealing with interest rate and inflation hedging has halved mdash; from 38% in 2008 to 18% in 2009.
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