4 in 10 schemes hit triggers in 2013

More than 40 per cent of schemes with de-risking triggers in place saw them activated by improving investment returns in 2013, according to Aon Hewitt’s third annual UK Pension Scheme Triggers survey.

Aon Hewitt’s Pension Risk Tracker shows that the deficit on FTSE 350 pension schemes had fallen to under £300bn by December 2013, down from over £400bn in January 2013.

The research, ‘Triggers during 2013’, shows that UK pension scheme funding levels improved significantly during the second and third quarters of 2013. Aon Hewitt says these market dynamics have enabled many schemes to recover some of the losses incurred throughout 2012 and early 2013. The consultancy put the fall down to a combination of successive months of low gilt yields following quantitative easing, as well as limited return from growth assets.

The survey found that 20 per cent of UK pension schemes currently have a formal trigger strategy in place – either as a monitor of funding levels or bond yields – to prompt a trustee review of funding strategy as certain pre-agreed levels are breached.

Aon Hewitt partner Paul McGlone says: “2012 and early 2013 saw many pension scheme funding levels decline significantly as quantitative easing saw real gilt yields settling just under zero. Many of the schemes we surveyed in previous years were substantially ‘under water’ compared to where their triggers were, and needed to increase their funding position by 10 per cent on average just to reach their next trigger level.

“However the last year, and the second and third quarters of 2013 in particular, have been more positive as UK schemes benefited from increasing gilt yields while growth assets in their portfolios also performed strongly. For many pension schemes, this has allowed them to recover their funding positions – and to start to consider opportunities for de-risking their investment strategy.”

Aon Hewitt partner and head of client solutions, implemented consulting Sion Cole says: “Awareness and speed are critical for schemes which want to take advantage of market opportunities. We have seen that schemes with triggers have typically been swifter to respond to the improving funding environment, either removing some riskier return seeking assets from their portfolio, or looking to mitigate the risk through interest rate hedging.

“The good news is that the improvements in funding position seen in Q2 and Q3 are largely still with us and there is good reason to expect that further de-risking opportunities are likely to occur during 2014.”