UK defined benefit (DB) pension scheme sponsors appear to be further along in implementing innovative risk management solutions to key issues than their counterparts in the U.S. and Canada, according to Aon Consulting, the global human capital consulting organisation of Aon Corporation (NYSE: AON).
While the US and Canada are concentrating on interest rates and equity markets, UK pension schemes have, in many cases, already come to grips with these issues and so have moved on to grappling with the more challenging matters of longevity and inflation.
In a survey of top global financial services organisations providing pension risk management products and solutions to plan sponsors in the UK, U.S., and Canada, results show that 58 percent claim interest rates as the most important risk facing DB pension plan sponsors between now and 2013, followed by longevity risk (21 percent), equity markets (15 percent) and inflation (6 percent).
Overall, respondents note longevity and equity market risks as the two most difficult risks to mitigate and remove (see table below for an overview of the regional breakdown).
While each of the three geographies face their own unique issues, there is common acceptance that pension plans need to:
Be diligent in measuring and monitoring all risk types;
Set asset mix and investment structure suitable to plan design and individual needs; and
Have solid skills and knowledge of risk management best practices.
This last is a telling factor that reveals how many large multinationals recognise the growing need for plan sponsors and trustees to remain extremely well versed and educated in the complexities of pension risk management
Andy McKinnell, investment principal and actuary, Aon Consulting commented:
Historically, the risk management products and solutions available to plan sponsors in the UK have been more advanced than those in the U.S. and Canadian markets.
“While dealing with equity market volatility and interest rate risks are important in the UK, the local market has already developed products and solutions that help schemes deal with these matters effectively. We have now moved on to consider the more challenging risks of longevity and inflation, which are essentially the next part of the conversation in pensions. UK schemes have access to pooled fund solutions that simply aren’t available in the US and Canada..
However, globally, current DB plan governance structures do not support rapid implementation of new strategies, and the tendency has been for plan sponsors to take on risk in order to improve their funded position. Though, improving funded status is dependent on rising long-term interest rates and strong global equity markets.
