Just a quarter of employers consider their defined benefit (DB) pension scheme to be a key business risk, as three-quarters believe they have bought this risk under control.
Many organisations (66%) now consider pension scheme risk alongside other commercial risks, such as the effects of a down-cycle on both corporate trading value and pension scheme value, according to Aon Consulting’s Employer survey 2008. Around 25% of UK employers have DB schemes that are worth more than the business they operate, while a further sixth worth more than half of the business’ value.
The survey also found that the number of DB schemes which are open to both new entrants and future accrual has reached a record low of 17%. Nearly two-thirds, however, are closed to new members but allow existing members to earn new benefits. The top reason behind employers’ decisions to keep a scheme open to future accrual is the competitive advantage in retaining staff.
Almost half of all pension schemes made a change to their investment strategies during 2007, with 23% reallocating a tenth or more of their growth assets to bonds. Schemes have also moved significantly into alternative asset classes, with 22% including hedge funds into their portfolio.
Paul Dooley, senior consultant and actuary at Aon, said: “It is encouraging to see employers consider pension scheme risk alongside other commercial risks. Corporate decision making can be improved by understanding how pensions risks are related to other business risks, both in terms of the potential size of risks and the links between them. In the current economic environment, it will be even more valuable for both companies and trustees to understand the sponsoring employer’s business risks when taking decisions on the financial management of pension schemes. Where companies are experiencing trading difficulties it is crucial that the Pensions Regulator supports those employers that are working together with trustees to meet their common goals.”
Marcus Hurd, head of corporate solutions at Aon, said market conditions have combined with accounting conventions to allow employers to settle their pension liabilities at an affordable level for the first time.