Carrot is just out of reach for pension plans
18 April 2013 London
Image: Shutterstock
Aon likened the current state of pension plans as: “a donkey pursuing a carrot dangling from a stick hooked in front of the donkey.”
Its 2013 Global Pension Risk survey found that most UK pension plans (more than 90 percent) are now indicating that they have a long-term objective—typically expressed as a buy-out objective or self-sufficiency objective.
“When we carried out the 2009 Global Pension Risk survey the villain of the piece was the asset side of the balance sheet,” said Aon. “Assets were in a depressed state, following the chaos of the global credit crunch. Since then assets have recovered substantially—equities are up by around 70 percent from their low point in 2009.”
But four years later, the firm points to not the assets as the cause of a problem, but the liability side of the balance sheet; the historically low levels of yields on government bonds causing liabilities to soar.
The survey emphasises the central role that bonds are expected to play in pension plan portfolios, and pointed out the relative death of equities.
“With many commentators (not for the first time) warning of a looming bubble in ‘safe haven’ government bond markets (the defensive asset of choice for pension trustees) the search is clearly on for ‘better bonds’ for unusual times and more use of opportunities from a wider credit spectrum.”
“Phrases such as the ‘death of the cult of the equity’ seen in trade press coverage in 2012 make reference to the fact that pension plans on average now hold more bonds than equities. George Ross-Goobey’s seminal argument for equities being the natural investment for pension plans, now dating back over 40 years, is literally history. This structural shift in defined benefit pension plans’ appetites is permanent and we are merely somewhere along the journey to an endgame.”
Its 2013 Global Pension Risk survey found that most UK pension plans (more than 90 percent) are now indicating that they have a long-term objective—typically expressed as a buy-out objective or self-sufficiency objective.
“When we carried out the 2009 Global Pension Risk survey the villain of the piece was the asset side of the balance sheet,” said Aon. “Assets were in a depressed state, following the chaos of the global credit crunch. Since then assets have recovered substantially—equities are up by around 70 percent from their low point in 2009.”
But four years later, the firm points to not the assets as the cause of a problem, but the liability side of the balance sheet; the historically low levels of yields on government bonds causing liabilities to soar.
The survey emphasises the central role that bonds are expected to play in pension plan portfolios, and pointed out the relative death of equities.
“With many commentators (not for the first time) warning of a looming bubble in ‘safe haven’ government bond markets (the defensive asset of choice for pension trustees) the search is clearly on for ‘better bonds’ for unusual times and more use of opportunities from a wider credit spectrum.”
“Phrases such as the ‘death of the cult of the equity’ seen in trade press coverage in 2012 make reference to the fact that pension plans on average now hold more bonds than equities. George Ross-Goobey’s seminal argument for equities being the natural investment for pension plans, now dating back over 40 years, is literally history. This structural shift in defined benefit pension plans’ appetites is permanent and we are merely somewhere along the journey to an endgame.”
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