A new survey from Aon Hewitt, the global human resources outsourcing and consulting business of Aon Corporation, found that after years of market turmoil, pension plan sponsors are shifting their asset allocation away from domestic equities in favor of liability-matching investments in an effort to reduce plan volatility.

Aon Hewitt's surveyed 227 large U.S. employers, representing $389 billion in total assets. The survey revealed that in 2010, 38 percent of plan sponsors reduced their exposure to domestic equities and the same percentage expects to do so in 2011. Just 4 percent expect to increase domestic equity exposure. Plan sponsors are primarily shifting assets to liability-matching investments with long-duration corporate bonds as the asset of choice. Thirty-two percent of plan sponsors expect to increase allocation to long-duration bonds and 24 percent expect to increase allocation to other corporate bonds, while just 13 percent expect to do so for government bonds.

"Once just a strategic idea without much traction, liability-matching investments continue to grow as a proportion of plan assets," said Ari Jacobs, retirement strategy leader at Aon Hewitt in a statement. "Regardless of the future direction of equity and bond markets, this shift should bring less volatility and greater predictability to pension plan costs."

Aon Hewitt's report also showed that static investment policies are giving way to dynamic investment policies, or "glidepaths," that incorporate plan-specific objectives, such as funded status, to mitigate pension risk. By 2010, more than one-in-five sponsors had already adopted some form of dynamic investment policy, up from 15 percent in 2009. Fully 29 percent of sponsors expect to be operating some form of dynamic policy in the next year.

According to the survey, glidepaths have become an increasingly attractive strategy for a few reasons. Most plan sponsors (78 percent) view glidepaths as a sensible way to reduce risk as their plans' funded status improves, and 42 percent feel they are an appealing way to take the emotion out of de-risking decisions. Additionally, 33 percent say glidepaths offer the potential to reduce long-term plan costs.

"Most sponsors believe that their plans should take on less risk as they reach full-funded status," said Jacobs. "These sponsors find glidepaths compelling because they translate this view into investment policy. Additionally, we believe that this strategy is a smart way to harness market volatility for the benefit of the plan and the sponsor, because glidepaths can potentially reduce cost even as they reduce risk."

As more plan sponsors have turned to glidepaths to manage pension risk, fewer are making fundamental changes to their plan design. While a majority of plans (61 percent) are already closed to new entrants, many U.S. plan sponsors continue to accrue benefits for at least some portion of their workers. Just under a third (32 percent) of plan sponsors now report frozen plans, up slightly from 30 percent in 2009, and only 16 percent believe a freeze is likely in the future.

"As funding levels continue to creep up from the dangerously low levels we saw in 2008 and 2009, we see the attitudes of plan sponsors shifting," said Cecil Hemingway, global head of retirement at Aon Hewitt. "Confusion and anxiety have faded, and most sponsors are making substantial changes in the management of their retirement programs."

Other study findings include:

One in five plan sponsors raised their global equity exposure in 2010, compared to just 13 percent that lowered this exposure. Roughly equal proportions expect to raise and lower this exposure in the next 12 months.
Nearly 20 percent of plan sponsors raised exposure to alternative asset classes, while only 10 percent lowered exposure in 2010. Nearly one-in-five (19 percent) expect to raise exposures in this category in 2011, just 8 percent expect to lower exposure.
Sixteen percent of plan sponsors are very likely to implement longevity-hedging strategies; 10 percent have already done so.
Thirty-two percent of pension plan sponsors have already delegated the full responsibility for the implementation of their investment policy, or are very or somewhat likely to do so in the future.

Instant Insights /

Pension plan sponsors shifting asset allocation away from domestic equities

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