UK pension schemes are falling further behind their long-term objectives, warns Aon Hewitt.

According to the Global Pension Risk Survey 2013, pension schemes have seen their average proposed timescale for reaching their long-term objective increase by around one and a half years since the same survey in 2009.

Even so, the survey also showed that 90% of schemes now have a long-term objective, compared with just 60% in 2009.

Kevin Wesbroom, partner and UK lead, Global Risk Services, at Aon Hewitt, said: "As liability levels have continued to rise, many pension schemes have been treading water and drifted further away from their long-term targets.

"Trustees need to prepare to take action for when funding levels improve so that their schemes are not left out at sea as a surge of de-risking opportunities and liability management activity floods the market."

Wesbroom said that most schemes now have long-term targets in place, and that these are typically expressed as buyout, particularly for smaller schemes, or self-sufficiency.

However, schemes have moved further away from reaching their goals. In 2009 schemes were hoping to reach their target in 2020, but in the 2013 survey the deadline moved to 2025.

"This is a result of spiralling liabilities, driven in the majority of cases by the historically low levels of yields on government bonds," explained Wesbroom.

He added: "Given this situation, schemes need to ensure that they are ready to take short-term tactical action to help them move towards, rather than away from their future targets.

"Despite ongoing economic uncertainty, it is feasible to imagine a period of benign asset markets and a reduction in liabilities on the back of rising interest rates. As part of a complete financial management plan, schemes should know what actions they would take in a variety of circumstances including this one."

The survey also showed that 44% of the respondents have frozen their plans, up from 21% in 2009, as part of initial liability management efforts, which shows, according to Aon Hewitt, a reluctance by trustees to participate in broader liability management exercises aimed at reducing long-term liabilities and accelerating flight plans.

Wesbroom said: "So far, de-risking has focused mainly on the asset side of the balance sheet but, in order to reach their longer-term objectives, pension schemes now need to start concentrating on managing their long-term liabilities as well.

"To date, schemes have been slow to take action on the liability side but we expect to see activity in this area increase, particularly with regard to pension increase exchange exercises at retirement."

First published 26.02.2013

monique_simpson@wilmington.co.uk