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Aon points to investment approach differences between UK, US pension plans

Research conducted by Aon Consulting, the human capital consulting organization of Aon Corporation, has found that US pension plan managers have been more aggressive than their UK counterparts when it comes to investing in equities.

According to a new analysis by Aon Consulting, 62% of pension plan assets for US Fortune 100 companies were invested in equities at the end of 2005, compared to 58% of the 200 largest pension plans in the UK (including those in the FTSE100). This is similar to the total proportion of pension plan assets invested in equities in 2004, when the US and UK were at 62% and 59%, respectively.

However, Aon Consulting believes that these total figures disguise a trend in the UK. With stock markets performing well relative to most other markets in 2005, one would expect the total proportion of equities in pension plans to increase (all things being equal). However, in the UK, this has been offset by 12% of companies in this analysis reducing their allocation to equities by more than 5%. Nearly all of these switches were from equities to bonds.

Our data indicates that the average US pension plan exposure to equities – net of the impact of market movements – has remained relatively stable over the last few years, suggesting plan sponsor risk tolerance has not changed much despite the market downturn of 2001 and 2002, said Jim Scott, senior vice president at Aon Consulting. However, the allocation to traditional domestic equity has reduced modestly in favor of international equities, alternatives and real estate, as sponsors seek higher returns and better diversification.

Aon Consulting also analyzed the impact pension plans have on company balance sheets in the US and UK. For US companies analyzed, overall pension plan assets are, on average, approximately 15 % of the market capitalization of the company, which is comparable to 16% in 2005. However, this is less than UK companies analyzed, where the overall pension plan assets are, on average, about 23% of the market capitalization, down 1% from the end of 2005. When combined with the somewhat lower allocation to equities, this shows UK companies were exposed to slightly less pension plan risk during the last year.

The US market has been anticipating pension reform for some time and it finally happened this year, said Mr Scott. It will be interesting to see if sponsors will now begin to change the allocation of assets more in favor of fixed income in order to better match liabilities with assets, but at the expense of higher expected returns.