UK pension schemes are still running too much interest-rate risk, Aon Hewitt has warned.
On average, Aon Hewitt said that closed and frozen schemes should be protecting against at least 70% of their interest-rate risk, however the average amount hedged is closer to 30% to 40%.
John Belgrove, Aon Hewitt senior partner, said: "Of course, any decision to change current levels of hedging needs to be made in relation to a scheme's specific situation.
"However, our analysis suggests that on average UK pension schemes are leaving themselves over-exposed to long-term rate changes when compared to many other risks."
He said that a pension scheme effectively locks in a certain future rate when it hedges out some of its fixed interest-rate liabilities.
Belgrove added: "Many pension schemes have been holding off implementing this kind of protection until rates rise.
"While it is true that short term rates haven't moved, long term rates have moved up more than many expected, so now may be a good time to start taking more of this risk off the table."
Aon Hewitt said when it comes to dealing with interest-rate risk, trustees should:
- understand and quantify the risks to which your scheme is exposed
- understand the impact further interest-rate (and inflation) hedging can have on you scheme
- understand training on liability risk management tools
First published 11.03.2014
monique_simpson@wilmington.co.uk