US funds change strategies in preparation for termination

The majority of US corporate plan sponsors want to terminate their frozen pension plans quickly but don’t have the sufficient assets to do so, according to Cecil Hemingway, US Retirement Practice Leader with Aon Consulting. A new survey by Aon, of more than 70 US organisations with a cumulative total of frozen pension plan asset of more than $50 billion, found that 81 per cent are planning to change their investment strategy in the near future, with many looking to hedge significant risks (35 per cent), change investment to reflect the shorter investment horizon to termination (27 per cent) or move to a more liability-driven investment strategy (19 per cent).

“Survey participants told us they made the design changes associated with closing their pension plans or ending future benefit accruals. However, without addressing the investment paradigm, they are leaving themselves open to significant future risk. Those shifting investment strategies are addressing the risks still inherent in their pension plans, while getting their plans as well funded as quickly as possible,” he said.

“Companies that continue to invest the way they always have will continue to experience considerable volatility in both their accounting expense and contribution requirements, which can equal millions of dollars in lost assets. Investment strategies that reflect the special nature of frozen plan’s liabilities and the organisation’s ability to take risk can be used to mitigate that volatility and assist plan sponsors with their desire to safely fund these plans.”