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DB pensions’ funding targets are unrealistic
24 June 2014
New strategies are needed to generate stability for UK DB pensions, according to new research by Aon Hewitt
Funding targets for UK defined benefit (DB) schemes to
reach self-sufficiency may not deliver the stability and
certainty that trustees and sponsors expect, according to
analysis by Aon Hewitt.
The findings of Pensions Stability White Paper
– turning theory into reality suggest that true
self-sufficiency is expensive and
hard to achieve and that new strategies may be
"Even modest risk accumulates
over time, assets are volatile and the only way that a sponsor
can be sure of not needing to pay more contributions, is to
over-fund the scheme substantially," said Paul McGlone, partner
at Aon Hewitt.
A disadvantage of over-funding for sponsors is that more
money will be devoted to the initial outlay. That extra money
may mean that clients will have to over-pay in the future. For
a scheme to have a 10% chance of future deficit means that
there is a 90% chance it will end up having a future surplus,
according to the paper.
The majority of UK pension schemes said that
self-sufficiency was their main long-term objective in Aon
Hewitt’s Global Pension Risk survey last
year. McGlone said that pension funds could consider options to
improve long-term funding.
"We urge trustees and sponsors to review their funding
targets and strategies and to take action to reach a position
of stability – meaning fewer surprises, less
intervention and a reduced chance of eventual surplus or
deficit," added McGlone.
"Sponsors and trustees should look at options outside of the
pension scheme, such as contingent assets, to provide the
stability required. As schemes approach full-funding we see
[contingent assets] having a role to play in long-term funding,
rather than just being a specialist tool for specific
situations," he added.