Management Consulting

In 2022, Aon identified a significant trend among UK defined benefit (DB) pension schemes, which were increasingly focusing on their investment strategies to prepare for risk settlement. Many schemes were shifting their long-term goals from self-sufficiency to pursuing buyouts, necessitating early and strategic investment preparations. This included essential steps such as data cleansing, benefit specification, and governance structure agreements, all aimed at ensuring readiness for when favorable insurer pricing became available. Aon's Risk Settlement team, having facilitated over £7.8 billion in transactions in 2021, emphasized the advantages of early investment preparation. They highlighted that schemes could avoid potential roadblocks, such as holding long-dated illiquid assets that could elevate risk and costs. By strategically allocating assets to gilts, swaps, and credit, schemes could better match insurer pricing and reduce exposure to volatile growth assets that insurers typically avoid. This proactive approach not only aimed to lower risks and costs but also integrated buy-ins into the overall strategy, enhancing the path to full buyout. Lucy Barron, a partner at Aon, noted that a holistic approach to managing longevity, investment, and pricing risks was crucial for schemes aiming for successful buyouts. Well-prepared schemes were more likely to attract competitive pricing from insurers, leading to better financial outcomes. Aon provided a flexible toolkit for schemes, including synthetic credit options to adjust credit exposure cost-effectively and strategic targets for hedging based on market conditions. This comprehensive understanding of insurer strategies allowed schemes to make informed decisions, ultimately facilitating smoother transitions to buyout funding with minimized risks and costs.