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UK pension schemes warned of "investment blind spot"

10 September 2012

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Aon Hewitt's 2012 Delegated Investment survey shows governance issues are still affecting the investment approach of pension schemes.

Findings of the 2012 Aon Hewitt Delegated Investment Survey show the significant steps being taken by trustees to address a lack of investment expertise and to improve their governance and speed of decision-making but also show how many defined benefit (DB) schemes remain limited in their ability to respond to fast-moving markets.

Almost three-quarters of 329 schemes that participated in the survey - covering an estimated £150bn of UK DB pension assets - said that no more than one in four trustees were an investment expert – which according to Aon is unchanged from the findings of the 2011 survey. Two-thirds of respondents said trustee boards spend five hours or even fewer each quarter on investment and those surveyed among small schemes indicated that they were spending even less time on investment matters. 

Sion Cole, partner at Aon Hewitt, said: "Trustees' knowledge and understanding of investment matters has developed since the launch of this survey in 2010. However, it is clear from our findings that the majority of trustees are acutely aware of their limitations when it comes to making investment decisions, particularly as a result of the current challenging economic climate.

Cole said the industry is seeing an increase in the use of investment committees, independent trustees and delegated investment, but warned there is a danger that trustee boards which do not address these issues will be missing crucial opportunities. "Trustees, particularly of smaller, resource-constrained pension schemes, need to review their approach continually to ensure that their scheme is in the best possible position." 

The survey reveals that one of the key changes made by trustees is the increasing adoption of a delegated approach to investment. The findings show that 27% of UK pension schemes have now delegated implementation of investment decisions to a third party. This is an increase from 17% in 2011. The results suggest that  delegated investment is set to grow rather than being a temporary trend, with an additional 10% of those surveyed saying that they intend to appoint a fiduciary manager or delegate investment issues.

Cole said: "The increase in delegation from last year's survey is encouraging and is contributing to the growing popularity of flight plans. Half of UK schemes now have a systematic plan for changing risk levels in light of changing market conditions and a further third are planning to explore flight plans, which is a substantial increase from last year. Moreover, for flight plans to add the most value, there needs to be regular monitoring of risk and increased agility in execution. Delegating investment decisions provides this and allows trustees to focus their time more effectively."

The survey, however, also showed that diversification in asset allocation remains static. Almost half the schemes which were interviewed for the survey are still focused on traditional asset classes, investing in three or fewer asset classes - these being equities, fixed income and real estate. Large schemes are much more diversified than small ones, with four-fifths of schemes with £1bn or more in assets investing in at least four different asset classes.


First published 10.09.2012