A new survey from Aon Hewitt, the global human resourcesoutsourcing and consulting business of Aon Corporation, found thatafter years of market turmoil, pension plan sponsors are shifting their asset allocation awayfrom domestic equities in favor of liability-matching investmentsin 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, 38percent of plan sponsors reduced their exposure to domesticequities and the same percentage expects to do so in 2011. Just 4percent expect to increase domestic equity exposure. Plan sponsorsare primarily shifting assets to liability-matching investmentswith long-duration corporate bonds as the asset of choice.Thirty-two percent of plan sponsors expect to increase allocationto long-duration bonds and 24 percent expect to increase allocationto other corporate bonds, while just 13 percent expect to do so forgovernment bonds.

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

Aon Hewitt's report also showed that static investment policiesare 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 sponsorshad already adopted some form of dynamic investment policy, up from15 percent in 2009. Fully 29 percent of sponsors expect to beoperating some form of dynamic policy in the next year.

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

"Most sponsors believe that their plans should take on less riskas they reach full-funded status," said Jacobs. "These sponsorsfind glidepaths compelling because they translate this view intoinvestment policy. Additionally, we believe that this strategy is asmart way to harness market volatility for the benefit of the planand the sponsor, because glidepaths can potentially reduce costeven as they reduce risk."

As more plan sponsors have turned to glidepaths to managepension risk, fewer are making fundamental changes to their plandesign. While a majority of plans (61 percent) are already closedto new entrants, many U.S. plan sponsors continue to accruebenefits for at least some portion of their workers. Just under athird (32 percent) of plan sponsors now report frozen plans, upslightly from 30 percent in 2009, and only 16 percent believe afreeze is likely in the future.

"As funding levels continue to creep up from the dangerously lowlevels we saw in 2008 and 2009, we see the attitudes of plansponsors shifting," said Cecil Hemingway, global head of retirementat Aon Hewitt. "Confusion and anxiety have faded, and most sponsorsare making substantial changes in the management of theirretirement programs."

Other study findings include:

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