A way through the maze the challenges of maintaining UK pension schemes

A way through the maze
The challenges of managing UK
pension schemes
An Economist Intelligence Unit report

commissioned by


A way through the maze
The challenges of managing UK pension schemes

About this research

A way through the maze: The challenges of managing
UK pension schemes is an Economist Intelligence Unit
report that examines the risks associated with running
UK pension schemes, and explores the approaches to
governance, funding, investment, and scheme design
that companies use to manage these risks. The report
was commissioned by Towers Perrin. Phil Davis was the
author of the report and Rob Mitchell was the editor.
The Economist Intelligence Unit bears sole
responsibility for the content of this report. The
Economist Intelligence Unit’s editorial team executed
the online survey, conducted the interviews and
wrote the report. The findings and views expressed
in this report do not necessarily reflect the views of
Towers Perrin.
Our research for this report drew on two main
initiatives:
● We conducted a survey of 206 C-level, or board-level

executives of UK companies in late summer 2007 as
the credit crisis was emerging. Respondents were
primarily chief executive officers, chief financial
officers and chief human resources directors,
although some other roles were also represented
in the sample. The survey included companies, and
pension schemes, of a variety of sizes, and from a
wide range of industries.
● To supplement the survey results, the Economist
Intelligence Unit also conducted a programme
of qualitative research, comprising a series of indepth interviews with trustees, advisers and other
participants in the pensions environment.
We would like to thank the many people who helped
with this research.

© The Economist Intelligence Unit 2008

1


A way through the maze
The challenges of managing UK pension schemes

Executive summary

● The risks associated with running UK pension
schemes are becoming more severe. The majority of
respondents questioned for our survey believe that
the risks facing their organisation’s pension scheme
have increased over the past few years. The key risks,

according to respondents, are regulatory changes that
could affect funding, which are cited by 48%, changes
to mortality assumptions, which are cited by 47% and
volatility of equities, which is cited by 40%.
● Better knowledge and understanding is a key risk
management tool. When asked about the aspects of
their scheme management that they are keen to improve
in the next few years, items related to “knowledge and
understanding” score highly. For example, improving
their understanding of funding options is seen as the
main priority, cited by 42% of respondents, followed
by improving their understanding of long-term trends,
which is cited by 36%. With new risks on the horizon,
and new techniques to manage, mitigate or transfer
them becoming available, keeping abreast of new trends
and often complex concepts has become more pressing
than ever.
● Performance management remains an important
weakness. When asked about their strengths and
weaknesses with regard to different aspects of scheme
governance, respondents saw their strengths as
the setting and monitoring of investment strategy
and the managing of relations between trustees
and the corporate sponsor. They were also fairly
confident about their ability to put in place a formal
process to identify risks and monitor those risks on
an ongoing basis. The main areas of weakness were
seen to be performance management—of investment
consultants and trustees in particular—and enhancing
2

© The Economist Intelligence Unit 2008

trustee competencies. Many companies, it seems,
have difficulties in determining the metrics that apply
to their scheme, and in conducting performance
management based on outcomes.
● More innovative investment techniques have
yet to enter common practice. Tools to optimise
investment strategy, such as liability-driven
investment or the use of derivatives, are widely
discussed and written about in the business press,
but they remain little used among UK businesses.
Just 14% of respondents say that they already have
liability-driven investment in place, and 17% say
that they use derivatives to hedge interest rate and
inflation risk. Appetites to use these tools in future
are relatively strong, however, with 41% intending
to apply liability-driven investment in the next three
years and 39% intending to use derivatives.
● The idea of transferring liabilities has its appeal,
but practical considerations are preventing takeup. Appetites for the concept of bulk annuity buy-outs
seem relatively strong, with 60% of respondents
saying that they would transfer at least some of their
liabilities if they could do so at a competitive price
with the full support of stakeholders. In reality,
however, most respondents say that they would be
unlikely to adopt this approach: just 19% intend to
transfer liabilities to an insurance company over the
next three years, and 61% say that they do not intend

to explore this option. The main barriers are cited as
being the reluctance of trustees to support such deals,
and fears about reputational damage should the
third party fail to meet its obligations. A significant
proportion also believes that the economic cost of
buy-outs is simply too high to consider it.


A way through the maze
The challenges of managing UK pension schemes

The risk environment

Pensions once inhabited an obscure corner of
corporate life, ignored by everyone until it was their
turn to accept the gold carriage clock and head out
the door for retirement. How times have changed.
Pensions talk is on the lips of employees, employers,
politicians and the thousands of advisers that service
retirement schemes. A perfect storm of volatile market
conditions, stringent new rules and demographic
change has created unprecedented uncertainty over
pension provision. Many employers that blithely
created final salary schemes years ago as a standard
employee benefit now wish they had been more
circumspect. And employees increasingly fear that the
benefits they believed were rightfully theirs could be
snatched away.
The fears are quantifiable. The majority of
respondents questioned for the EIU/Towers

Perrin survey believe that the risks facing their
organisation’s pension scheme have increased over
the past few years. A full two-thirds said that the
risks had increased, compared with just one in ten

Over the past three years, how do you think the risks associated
with managing your organisation’s pension scheme have
changed?

who said that they had decreased. Smaller schemes
appear to be feeling the heat most keenly—four out
of ten schemes with assets of less than $1bn said that
risks had increased “significantly”, compared with
three out of ten larger schemes. Arno Kitts, head of
the investment council of the National Association of
Pension Funds, says that the concerns of executives all
centre on one issue. “Obviously the key risk is that the
pension fund cannot pay pensions.”
The poor financial state of some pension schemes is
clear to see. About 6% of company schemes surveyed
had liabilities amounting to more than half of the
company’s market capitalisation, while four in ten
said that liabilities were over 20% of the market
capitalisation. That represents a serious risk to the
financial health of the scheme sponsor. Given that the
majority of the schemes in the survey have assets of
more than £500m, the effect on the overall economy
is not insignificant, either.
Mr Kitts outlines the shock that many companies
have suffered in recent years. “If you are a

manufacturing company, you have realised that there
is a large investment animal associated with your
What is the size of your organisation’s liabilities in relation to
its market capitalisation? Please choose the option that you think
most accurately reflects your scheme.

(% respondents)

Increased significantly 32
Increased slightly

32

No change

26

Decreased slightly

8

Decreased significantly

2

(% respondents)
Between 1% and 10% of market capitalisation
32

Between 11% and 20% of market capitalisation

29

Between 21% and 30% of market capitalisation
25

Between 31% and 40% of market capitalisation
6

Between 41% and 50% of market capitalisation
3

50% of market capitalisation or more
6
Source: Economist Intelligence Unit survey, 2008.

Source: Economist Intelligence Unit survey, 2008.

© The Economist Intelligence Unit 2008

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A way through the maze
The challenges of managing UK pension schemes

Which of the following do you consider to be the most significant
risks to your organisation from your pension scheme?
Please select up to three.
(% respondents)
Regulatory changes affecting pension funding

48

Changes to mortality assumptions
47

Volatility of equities
40

Volatility of future inflation expectations
36

Potential future accounting changes
26

Reductions in expected future investment earnings due to changes in asset strategy
25

Increasing deficits
21

Volatility of long-term bond yields
20

Restrictions on desired corporate activity arising from regulatory changes
17
Source: Economist Intelligence Unit survey, 2008.

business that can have a significant effect on it,” he
says. This is leading companies to examine, perhaps
for the first time, the risks posed by their pension

schemes and how to manage those risks. “The biggest
driver of change,” says Mr Kitts, “is when the financial
director asks ‘Why is there this big, volatile number in
my accounts and what can I do about it?’.”
According to respondents, the most significant
overall risk to their organisation from their pension
scheme is regulatory changes to funding, which
are cited by 48% of respondents. This is hardly
surprising—regulation has stopped employers
taking surpluses out of pension schemes to reinvest
in the business. This means that any contributions,
including extraordinary contributions, are unlikely
ever to be available to the sponsor again.
At the same time, changes in accounting rules
have forced assets held as long-term investments
to be valued at prevailing market prices. As a
result, at times of market stress, pension schemes
appear hopelessly underfunded and a large one-off
contribution may be required from the sponsor. The
likelihood of this happening is not remote: four in ten
4

© The Economist Intelligence Unit 2008

respondents said that special employer contributions
would be necessary over the next three years.
The risks posed by improving mortality assumptions
are cited by 47% of respondents. The main worry is
simply that people are living longer, so are a bigger
drain on the pension fund’s resources. Over the past

22 years, the expected average lifetime has risen by
2.7 years, or 3.5%, from 77.7 years to 80.4 years,
according to the Credit Suisse longevity index.
Women’s life expectancy is higher than that of men
and has increased from 80.9 years to 82.7 years over
the same period.
Moreover, people living longer is only part of
the problem. The more taxing issue is predicting
the rate of increase of longevity. Steven Haasz,
managing director, wholesale, at Prudential, sums
up the scale of the difficulties. “The risk of 75-yearolds living just a year longer is huge. It adds about
3% to a scheme’s liabilities, which may negate any
aggressive investment strategy that has been put in
place to increase returns.” The Holy Grail is to develop
products that hedge out mortality risk—and several
investment banks are working on it—but as yet such a
financial instrument does not exist.
The volatility of equities was cited as the third
greatest risk for retirement schemes, cited by 40% of
respondents. Although many schemes have reduced
their dependence on equities following the 200003 market downturn, an astonishing one in ten
still have an equities allocation of 80% or higher in
their portfolios. Even the most financially secure of
companies, with a predominantly youthful workforce
and few pensioners, would struggle to justify such an
overwhelming dependence on the riskiest and most
volatile asset class.
In general, it is apparent that survey respondents
are most worried about the risks over which they
have least control. After all, companies can do little

about regulatory changes except to lobby against
harmful decisions. And there is, as yet, no solution for
managing longevity risk (or, indeed, a way to account


A way through the maze
The challenges of managing UK pension schemes

Which of the following corporate performance measures is most
affected by risks associated with your pension scheme?
Please select one.
(% respondents)

Balance sheet

43

Cash flow

25

Earnings (per share)

21

Credit rating

11

Source: Economist Intelligence Unit survey, 2008.

for a pharmaceutical company making a crucial
breakthrough to prevent strokes).
The other principal risk, stock market volatility,
is more manageable, through the use of derivatives
for example. But while technical solutions are
available, the result can be imperfect. Using fewer
equities might, for instance, have the unintended
consequence of reducing the likelihood of the fund
meeting very long-term liabilities, since shares are
generally considered a good hedge against inflation.
Risks associated with pension schemes can impact
on a variety of corporate performance measures.

Among respondents to our survey, 43% say that the
balance sheet is the most widely affected measure,
followed by 25% for cash flow, 21% for earnings per
share and 11% for credit rating.
When asked how effective they thought a number
of strategies were at reducing the risk associated
with their schemes, the answers varied depending on
the corporate measure selected. While governance
changes were seen as the most effective technique
across the board, respondents who selected balance
sheet as the most affected measure tended to
favour benefit design changes and liability-driven
investment—two approaches that can favourably
impact the balance sheet. Respondents who were
most concerned about cash flow had little time
for bulk annuity buy-outs, perhaps a reflection of

the high costs associated with these transactions.
Conversely, respondents who chose credit rating as
the measure most affected by pension risks tended
to be more adventurous and be most likely to favour
derivatives and bulk annuity buy-outs.
So pension schemes are becoming aware of many
of the risks they face but do not necessarily have the
tools to mitigate them. They are in the midst of a
perfect storm and are urgently seeking perfect advice
to navigate their way through it.

© The Economist Intelligence Unit 2008

5


A way through the maze
The challenges of managing UK pension schemes

Scheme governance

Amid the gloom there are, though, beacons of hope.
A surprising finding in the survey is that governance
changes to improve decision-making are seen as the
most effective measure to reduce the negative impact
of pension scheme risks. This rates more highly than
all other putative measures including benefit design
changes and the use of derivatives. Why does this
represent hope? Because governance is one of the few
solutions that can be applied without great expense

being incurred.
Chris Close, partner at Sackers, a specialist
pensions law firm, says that, in the past, many
trustee boards failed to realise they were pivotal
parts of the pensions machine. “Governance is really
important. Let’s not forget that some of the larger
schemes are as big as major corporations,” he says.
The Pensions Regulator, created in 2004, insists that
an amateur approach is no longer acceptable and
laid down governance guidelines earlier this year. It
recommended that pension scheme trustees should
focus on seven key points:
1.
2.
3.
4.
5.
6.

Trustee knowledge and understanding
Conflicts of interest
The employer’s covenant
Monitoring professional advisers
Keeping accurate records
Offering adequate defined contribution
investment choices
7. Ensuring proper procedures are followed
in wind-ups
The guidelines need to be adhered to if Maxwellsized disasters are to be avoided in the future, says
Mr Close. “If you have proper governance, it ensures

that the key risks are constantly on the agenda and
6

© The Economist Intelligence Unit 2008

improves the likelihood of trustees being able to
provide pension benefits. It would be sad if there
was another Maxwell lurking in the shadows and the
trustees had not taken sufficient steps to introduce
safeguards.”
Six out of ten respondents said that they are good
at setting and implementing processes to identify
risk. And a large majority of 67% said they are good
at setting and monitoring investment strategy.
Clive Gilchrist, managing director of Bestrustees,
an independent trustee firm, says that investment
strategy involves considerably more than appointing
a set of investment managers. “Setting investment
strategy means following the actuarial valuation,
conducting an asset-liability exercise and selecting
the investments in light of the covenant and risk.”
He adds that it is good practice to assess each
manager’s performance every quarter and interview
them at least once a year, so long as this does not lead
to short-term decision-making. “Organising a beauty
parade based on a single quarter’s performance is not
advisable.”
While monitoring investment returns is a tried and
tested process, just 51% of respondents said they are
good at measuring their own performance and that

of their consultants. Many ideas are being trialled
to develop consultant and trustee benchmarks,
although standardised objective criteria have yet
to be established across the industry. Bestrustees,
for one, is working on pilot schemes with several
pension funds to enable trustees to measure their own
effectiveness. On the simplest measure, the trustees
are invited to rank their colleagues on two issues: how
often they turn up at meetings and how much they
pay attention. Mr Gilchrist says that these questions
are more important than may appear at first sight.


A way through the maze
The challenges of managing UK pension schemes

How successfully do you think your organisation manages the following aspects of scheme governance?
Please rate on a scale of 1 to 5, where 1=Very successfully and 5=Not at all successfully.
(% respondents)
1 Very successfully

2

3

4

5 Not at all successfully

Managing relations between trustees and the corporate sponsor

27

36

27

7

3

Setting and monitoring investment strategy
26

41

22

9 1

Managing administrative aspects of scheme management
25

36

27

9

3

8

3

Putting in place a formal process to identify risks
25

38

25

38

26

Monitoring risks on a regular basis
29

71

Speed of decision making and execution
23

31

26

15

6

Manager selection
20

40

26

11

2

Measuring performance of asset managers
20

36

27

12

4

Enhancing trustee competencies
19

31

36

11

3

Measuring performance of investment consultants
18

33

33

11

5

Measuring performance of trustee board
16

32

30

16

6

Source: Economist Intelligence Unit survey, 2008.

“You do not need to be Einstein to be a trustee and
you do not have to generate lots of ideas. But you do

need to listen and react with common sense to advice
offered,” he says.
Administrators, too, should be monitored. Poor
administration has let down a number of pension
schemes, says Mr Close. “If record-keeping is poor,
benefits can be over- or under-stated and this can
harm the employer’s finances in the first case and
reputation in the second.”
There are other issues that are often mistaken as
meaningless detail but that are, in fact, critical to
governance. Take the size of trustee boards: large
boards of 15-plus trustees are considered inefficient
because there is often too much discussion and
insufficient analysis and decision-making. Equally,
boards of just three or four are fallible. They need
to be large enough to delegate time-intensive
issues, such as investment, to specialist committees.
Bestrustees believes that the average trustee board

should number five to 12, rising to between nine and
12 for larger schemes.
The managing of relations between the trustees
and corporate sponsor is another important
governance area and one in which many schemes
believed they performed well. The good performance
may be linked to the formalisation of the relationship,
following pressure from the Pensions Regulator. “In
the past,” says Mr Gilchrist, “discussions took place
around a table. Now they are more often conducted in
writing so there is an audit trail that could be shown to

the regulator.”
Procedures to resolve disputes over funding or
scheme strategy have also been formalised. The
regulator is now able to act as a referee, although
it has not empowered itself to pass judgment. This
is a recognition that both parties must reach a
compromise that they are happy with if they are to
continue to work for the good of scheme members.
“It is all about partnership—nobody forces a company
© The Economist Intelligence Unit 2008

7


A way through the maze
The challenges of managing UK pension schemes

Which of the following aspects of your pension scheme
management are you most keen to improve in the next year?
Please select up to three.
(% respondents)
Understanding of funding options (eg, use of contingent assets)
42

Understanding impact of long-term trends (eg, changes to longevity)
36

Asset allocation
35

Response to regulatory change
32

Performance management of fund managers
28

Understanding of investment trends
24

Management of interest rate and inflation risk
20

Relationships with members
19

Relationships with external advisers (eg, investment consultants and asset managers)
19

Speed of reaction to changes in capital markets
17

Other
3
Source: Economist Intelligence Unit survey, 2008.

to set up a pension scheme,” says Mr Gilchrist. “It is
there because the company believes that attracting
and retaining people is important.”
At the same time, without distance between
the trustee board and scheme sponsor, conflicts

of interest can arise. For example, companies may
use the same advisers as their trustees, and may be
unaware that this is the case. Mr Gilchrist says that
conflicts of interest are becoming less common. “It
was usual for the financial director to be a trustee, but
much less so now. The FD may attend meetings but it
should be on the explicit understanding that it is in a
company capacity.”
The issue of knowledge and understanding has
risen to the fore in the wake of the Myners Report
in 2001 and this is underscored by the survey.

8

© The Economist Intelligence Unit 2008

When asked about the aspects of their scheme
management they were keen to improve, aspects
of “understanding” scored highly. Improving
understanding of funding options, in particular,
is seen as a priority, cited by 42% of respondents,
followed by improving understanding of long-term
trends, cited by 36%. As might be expected, there is
a gulf between the knowledge base in small schemes
compared with larger ones. For instance, just 14%
of large schemes (those with £1bn-plus assets) said
that they needed to improve their mastery of asset
allocation in the next year, while 32% of smaller
schemes said that this was a critical learning point.
Trustees are well advised to take training seriously.

The regulator’s Trustee Knowledge and Understanding
regime is free and voluntary, and there are compelling
reasons to undergo minimum levels of training. Where
problems arise in funds, the regulator has intimated
that it would take a dim view of cases where basic
knowledge levels were low and little attempt had been
made to raise them.
Low levels of knowledge are the main reason why
many in the industry wonder whether the whole
model of lay trustees running pension schemes
should be overhauled. Should, for example,
pensions be run by professionals? After all, Myners
recommended that employers paid trustees for
their work. Surprisingly, Mr Gilchrist, a professional
trustee, believes any changes could be harmful.
“Being paid would not change anything for most
trustees. They do the job because they want to do
it,” he says. Lay trustees have much to offer, he
believes. “They are not investment experts, lawyers or
actuaries, but they know the company and its ethos,
and they know the scheme and its members. It would
be a great loss if things changed.”


A way through the maze
The challenges of managing UK pension schemes

Investment strategy

Sachs Asset Management. This resulted in a mismatch

of predominantly equities on the asset side, yet bondlike liabilities. “The strategy worked well in the 1990s,
but then they came unstuck,” he adds.
Scarred by this experience, many pension funds
realised that asking their investment managers to
beat an index or a rival manager had no bearing on
the fund’s ability to pay pensions. This long-overdue
realisation has dramatically changed the nature of
institutional investment. In terms of asset allocation,
the biggest shifts over the next three years are likely
to be increased use of private equity and a reduced
allocation to equities. Over one-fifth of respondents
said that they expected to have a greater allocation
to private equity in three years’ time, while more than
one-quarter expected to have a smaller allocation
to equities. Only 17% said they would have greater
exposure to equities.
Barings Asset Management says that exposure to
equities depends often on the financial health of the

Investment is an imprecise art and few, even among
the world’s best investors, end up with a masterpiece.
Failure inevitably occurs and each occurrence instils
fear and disillusionment in the minds of investors.
For this reason, investment styles come and go with
predictable regularity. As recently as the early 2000s,
the majority of pension schemes employed a balanced
approach, uniformly allocating 60% of assets to
equities and the remainder to bonds. The sharp stock
market downturn of 2000-03 inevitably threw many
of those portfolios into disarray and, today, the old

balanced approach is rarely seen.
But whether a high allocation to equities is
desirable is less important than whether there is a
coherent approach to investment. It is clear that, in
the past, many pension funds thought little about
what their investments were supposed to achieve.
“The mindset of pension funds was focused on assets
alone rather than assets relative to liabilities,” says
Iain Lindsay, a senior portfolio manager at Goldman

In the next three years, what changes do you expect to your asset allocation? If you do not use a particular asset class and have no
intention of doing so in the next three years, please select “Not applicable”.
(% respondents)
Greater allocation

No change

Smaller allocation

Not applicable

Equities
17

52

26

4

Bonds/Gilts
18

55

21

6

Property
17

44

15

24

Private equity
22

30

8

40

Hedge fund (specialist trading approaches)
17

22

10

51

9

51

Hedge fund (long/short equity style)
15

25

Commodities
11

29

11

49

Other
3

25

7

65

Source: Economist Intelligence Unit survey, 2008.

© The Economist Intelligence Unit 2008

9


A way through the maze
The challenges of managing UK pension schemes

pension fund. “I see a mixed picture,” says Jonathan
Cunningham, head of international sales at BAM.
“Some schemes are looking to add risk, investing
in less efficient emerging markets where there are
longer-term opportunities for alpha. Others use multiasset funds to try to take risk or volatility out of the
portfolio.”
Indeed, multi-asset funds are sweeping all
before them at the moment, sucking in assets at a
breathtaking rate. Their rise stems from many pension
schemes’ realisation that they threw the baby out
with the bath water when they ditched the balanced
approach. They are now increasingly adopting a
“new balanced” approach and employing multi-asset
funds to implement it. The main differences between
old balanced and new balanced is that the modern
version uses a bespoke benchmark that relates to
the liabilities, employs dynamic (rather than static)

asset allocation and uses best-of-breed funds run by
many firms rather than a single, monolithic balanced
manager.
Financial innovation is also playing a part in the
changed landscape. “Multi-asset funds now have more
tools at their disposal,” says Mr Cunningham. “They

can allocate to hedge funds, property, structured
notes and even products that provide returns from
falling markets.” BAM’s Dynamic Allocation Fund,
for instance, has a 23% allocation to international
equities, 40% to UK equities, 20% to funds of hedge
funds, 12% to property and 5% in cash. These
allocations are adjusted depending on economic
conditions.
Another popular investment approach that has
gained prominence in the post-2003 era is popularly
known as “core-satellite”. This is based on the belief
that most investment performance comes from
market “beta” and that active managers should be
used opportunistically only. So, a large weighting is
made to passive index-tracking strategies and a small
“satellite” portion is reserved for active management,
such as hedge funds.
But some schemes have come to believe that all
existing investing styles are flawed. An increasing
number is trying to remove investment benchmarks
from the equation altogether. A large minority of
respondents (43%) thought that liability-driven
investment (LDI) is the best way of reducing the

negative impact of pension scheme risk on the

How successful do you think the following strategies are at reducing the negative impact of pension scheme risks on your chosen
measure? Please rate 1 to 5 where 1 is very successful and 5 is not at all successful.
(% respondents)
1 Very successful

2

3

4

5 Not at all successful

Don’t know

Benefit design changes
24

30

23

13

3

8

Liability-driven investment
23

20

30

9

4

13

Governance changes to improve decision making and control of pension issues
21

39

20

11

3

6

Use of derivatives or structured products to manage interest rate and/or inflation risks
20

26

29

11

4

10

Use of derivatives or structured products to manage equity risks
17

27

28

15

4

9

Bulk annuity buy-outs
17

21

26

14

8

14

3

14

Use of contingent assets, guarantees and other credit support tools
16

28

27

12

Alternative assets, such as private equity and hedge funds
14
Source: Economist Intelligence Unit survey, 2008.

10

© The Economist Intelligence Unit 2008

24

31

16

7

8


A way through the maze
The challenges of managing UK pension schemes

company’s finances. This is perhaps a surprisingly
high figure given that the term “LDI” has been in
common currency for less than five years.
LDI aims to match liabilities with bond-like returns
that hedge out the effect of inflation and interest
rates. This is often done using a swap, since cash
bonds and futures are too exposed to the vagaries of
the market and do not have sufficiently long duration
to match the very long-term liabilities of pension
funds.
To some extent, LDI has been driven by mark-tomarket accounting rules, which mean that a drop in
value of a pension scheme’s assets imparts a nasty hit
to the balance sheet of the sponsor. Equities, among
the most volatile assets, are therefore less desirable.
While they reduce a deficit in the good times, a short-

term market blip negatively impacts a company’s
finances. Paul Bourdon, head of European pension
solutions at Credit Suisse, puts it this way: “If you
have 70% equities, over 20 years there is likely to be a

premium. But, over five years, there could be swing of
plus or minus 40%.”
Thus swaps, once little understood by most
pension funds, are now firmly on the radar. Survey
respondents revealed that derivatives to hedge
inflation and interest rate risk are becoming popular—
17% of respondents use them now and 39% intend to
use them in future.
Whereas early LDI adopters tended to buy swaps to
try to match all their liabilities, this has become less
common. While more mature schemes may seek to
match their remaining liabilities, newer schemes often

CASE STUDY

Liability-driven investment at WH Smith:
Easing up on equities drives down pension risk
In 2003, a reversal of fortunes on the high
street coupled with a very public private
equity approach prompted UK retailer WH
Smith to take a serious look at its pension
strategy. With earnings down and despite
the failure of a debt-laden buyout approach
in early 2004, the board suddenly became
extremely uncomfortable about the deficit
in its defined benefit scheme, then running
at about £152m.
In addition, 60% of the pension funds’
assets were invested in equities and 40%
were in bonds. If the market took a turn

for the worse, the deficit might balloon
even further, putting cash flow at risk and
threatening to scupper the shareholder
dividend.
“It was pretty clear that we had to de-risk
the pension scheme pretty significantly,”
recalls Alan Stewart, WH Smith’s group
finance director.

The board took a series of measures,
including two one-off contributions
totalling £170m, and a transfer of pension
assets from equities and bonds to a far less
volatile liability-driven investment (LDI)
scheme.
The company made its first contribution
of £120m into the scheme in 2004 and,
around the same time, began to look at ways
to escape the ups and downs of markets.
It eventually settled on an LDI approach.
“It was pretty clear from a relatively early
stage that an LDI solution was one that fit
our needs, but it took a lot of modelling to
determine the optimum position,” says Mr
Stewart.
At the end of September 2005, the
company moved 94% of its pension assets
into a large, liquid cash fund, hedging
against inflation and interest rate rises with
derivatives. “There really is no risk in the

major cash portion, that 94% of our assets,”
says Mr Stewart. Six percent (about £50m)
was invested in equity options. The total
portfolio is expected to return just above the
expected liabilities.
Pension liabilities are far more
predictable now, too. In April 2007, the
company capped its service accrual for
2,500 current employees who are still part
of the defined benefit scheme, which was
closed to new members 11 years ago (most
employees are part of the company’s defined
contribution plan). In effect this means the
risk to the company has gone down, because
it is easier to predict the expected cash flow
needed to cover payments for the 18,000
past and present employees currently
covered by the closed plan.
The result has been dramatic—today the
deficit is down to £42m and falling, and the
board feels confident that the LDI approach
has the company’s £635m in assets
sufficiently hedged against a bear market.
“In truth I don’t think I could have asked for
a better outcome in terms of what we sought
from our strategy,” says Mr Stewart.

© The Economist Intelligence Unit 2008

11


A way through the maze
The challenges of managing UK pension schemes

wish to test the water and match just a part of them.
“Schemes typically implement partial LDI solutions to
begin,” says Mr Lindsay. “They look to get comfortable
with the LDI strategy before deciding whether to
extend the match to a greater proportion of the
liabilities.” Hedging interest rate and inflation risk
with swaps typically consumes 60% of the scheme’s
assets, leaving 40% free to invest in “alpha-seeking”
strategies that can offset longevity risk and, in the
best-case scenario, produce a surplus for the fund.
Nevertheless, LDI remains a relatively unloved
strategy—just 14% of respondents said that they
already use it, although 41% intend to apply it in
the next three years. “LDI is talked about a lot more
than it is actually implemented,” says Mr Lindsay.
The resistance is often behavioural—trustees find it
hard to conceive of foregoing any windfall that comes
from rising interest rates or falling inflation. “In many
conversations with trustees they are concerned about
being locked in to the LDI strategy at the wrong point
in time,” he adds.
In addition, matching assets to liabilities is a
precise technique that may not deliver precise results

12

© The Economist Intelligence Unit 2008

given shifting mortality assumptions. “Some schemes
forego the precision of matching for the promise of
strong long-term equity returns,” says Mr Lindsay. “It’s
a balance and there is no obvious right or wrong.”
For others, the issue is more black and white. Raj
Mody, a partner and actuary at the pensions practice
of PricewaterhouseCoopers, believes that LDI can
be a crude, unreliable and expensive approach.
He advocates a proprietary strategy that he calls
“covenant-driven investment”, whereby companies
regard their pension schemes as fully-fledged
subsidiaries. Decisions about the pension fund are
no longer taken in isolation but in relation to other
business activities. Mr Mody believes that for some
sponsors this approach negates the need to hedge out
inflation and interest rate exposure. “If inflation goes
up, you may have the opportunity to pass the costs
onto your customers. This provides a natural hedge
for the pension fund rather than buying expensive
inflation instruments. The same applies when interest
rates fall—yes, your pension deficit tends to rise,
but lower rates are good for the company as a whole
because it can borrow money more cheaply.”


A way through the maze

The challenges of managing UK pension schemes

Funding

in heightened fear of making mistakes for which
they could be later held accountable, often open
negotiations with an aggressive view of the funding
levels required.
Some trustees will adopt an overly cautious
approach to funding issues. On occasion, trustee
boards have even asked for schemes to be funded to
insurance buyout levels, significantly higher than a
fully-funded ongoing scheme. Although they have
little chance of succeeding, at least the trustee
board’s minutes will record an attempt to extract the
maximum contributions from the scheme sponsor.
But such excesses are not only likely to fail—they
also risk damaging trust between the sponsor and the
scheme. One approach that can prevent the whole
relationship unravelling is for scheme sponsors to
take the lead in funding negotiations, rather than
simply reacting to a call for cash.

Pension scheme finances have improved
immeasurably in the past five years. Final salary
schemes of FTSE 100 companies had a combined
surplus of around £12bn in mid-July, according
to actuary Lane Clark Peacock, compared with a
deficit of £59bn in October 2002. But trustee boards
have long memories and funding remains a major

preoccupation. Indeed, understanding funding
options was the aspect of the scheme that most
survey respondents said they would like to improve
over the next year, with 42% citing it. This was way
ahead of improving asset allocation and investment
trends.
The eagerness to keep on top of this issue is
hardly surprising. Passed in November 2004, the
Pensions Act demands that each scheme sets a target
funding figure. But this number depends on several
variables and is open to negotiation. Trustees, living

Which of the following strategies have you used in the past three years, and which do you intend to use in the next three years?
If you have no intention of using a particular strategy, please select “Do not intend to use”.
(% respondents)

Already in place

Intend to use in next three years

Do not intend to use

Closure of defined benefit scheme to new members
46

22

31

Increased employee contributions

37

37

26

Special employer contributions
35

40

24

Transfer of liabilities to life insurance company
20

19

61

Closure of defined benefit scheme to future accrual
19

31

50

Transfer of liabilities outside of traditional insurance sector
17

23

60

Use of derivatives/ structured fixed interest products to hedge inflation/ interest rate risk
17

39

44

Liability-driven investment approaches
14

41

46

Use of contingent assets to support scheme funding
8

38

54

Source: Economist Intelligence Unit survey, 2008.

© The Economist Intelligence Unit 2008

13

A way through the maze
The challenges of managing UK pension schemes

Once funding has been agreed, both sponsor and
scheme need confidence that it can be delivered, even
if the company’s operations falter. So when asked about
the areas of their scheme that survey respondents
were keen to explore in the next three years, the use of
contingent assets was seen as a priority.
Contingent assets give the pension scheme a
claim on physical or financial assets owned by the
sponsor in the event that the company collapses or
is weakened to the extent that it cannot continue to
fund the scheme.
Just 8% of respondents said that they already
have contingent assets in place, but 38% intend to
use them over the next three years. There is a wide
choice of assets that can be called on in a contingency,
including money in escrow, a letter of credit from a
third party, property, receivables and loan issue notes.
There are also a number of trust-based solutions, such
as the approach that Marks and Spencer announced
in January 2007 whereby property assets were placed
into a partnership formed with its pension scheme.

14

© The Economist Intelligence Unit 2008

Of course, for those employers that have switched
all or part of their pension schemes onto a defined
contribution basis, funding is less of an issue. The
number of members in defined contribution schemes
exceeded those in defined benefit schemes for the
first time at the end of 2006. Nevertheless, while
the switch to DC rids companies of one set of risks,
another set come into play. For example, employees
may fail to make adequate payments into their
pensions, choose inappropriate investments and end
up with insufficient retirement income. A survey by
the National Association of Pension Funds published
in 2007 found that 81% of DC scheme members failed
to make proactive investment choices and were placed
in the default option. Mr Mody is concerned about the
long-term repercussions: “I’m not sure if companies
should be dumping all the risk on to the employee who
often does not understand the choices available. In a
decade or so, people in DC schemes will start retiring
in numbers and we may see a backlash as the problems
become clearer.”


A way through the maze
The challenges of managing UK pension schemes

Transfer of liabilities

Over the past decade, it has become customary for

large companies to sell off non-core areas of their
business in order to concentrate on activities that
they understand and can manage profitably. The
same rationale is also being increasingly applied to
pension funds. Transferring schemes in their entirety
to insurers is not as straightforward as divesting a
business unit but the market, spearheaded by Legal
& General and Prudential, has nevertheless been
buoyant. Prudential has completed more than 425
deals on its own, worth over £4bn in total. Some are
small transactions of just £1-2m but there have been
several £400m-plus deals including Ferranti and
Dalgety in 1999, and C&A in 2002.
Certainly, appetite for the concept of bulk annuities
seems strong: in our survey, 60% of respondents
said that they would transfer at least some of their
liabilities if they could do so at a competitive price
with the full support of stakeholders. This supports
Prudential’s belief that there could be deals in the
near future that dwarf the C&A buyout. “In the next 12
months, there are likely to be fewer but larger deals
getting done,” says Ted Clack, bulk annuities director
at Prudential.
At least ten new entrants (see boxout) to the
market in the past 18 months are hoping to take deals
that could break the £1bn level for the first time. This
would inject pace into a sector that previously focused
on schemes of insolvent companies. “This used to
be a winding-up business after an employer got into
difficulty,” says Mr Clack. “That has changed in the

past couple of years.”
A number of factors have combined to make the
environment for bulk annuity buy-outs more fertile.
First, the 2004 UK Pensions Act imposed new taxes
on defined benefit plans and established a regulator

If your organisation’s senior management could transfer all or
some of the organisation’s liabilities to a third party at a
competitive price with the full support of stakeholders, do you
feel they would choose to do so?
(% respondents)

Yes, they would
transfer all of our
liabilities

18

Yes, they would
42
transfer some of our
liabilities
No

40

Source: Economist Intelligence Unit survey, 2008.

with powers to impose penalties on companies
that did not reduce their deficits. Second, changes

to accounting standard FRS17 forced companies
to be more transparent in reporting their pension
liabilities, leaving their balance sheets exposed to
fluctuations in the market. Finally, life expectancy
is improving, making it more difficult to account for
future liabilities.
As a result, healthy schemes and healthy
companies are now looking at buyouts as a derisking
option, rather than as a last resort. Trustees, for
example, may seek a buyout because they are
concerned about the sponsor’s stability, particularly
if it is a highly leveraged company, possibly following
a private equity takeover. Alternatively, a company
may conduct a wide-ranging review of its activities
and decide that it no longer wants the operational and
regulatory risk of running a pension fund.
Financial innovation is helping to facilitate
buyouts. In the past, many schemes could not
consider buyouts because the hefty deficits made
© The Economist Intelligence Unit 2008

15


A way through the maze
The challenges of managing UK pension schemes

Overview of the bulk annuity market
Until a couple of years ago, only two names
were associated with pension buyouts: Prudential and Legal & General. That has now

expanded to about a dozen buyout firms,
many of them launched by former Prudential
executives. For example, Paternoster was
set up in 2006 by Mark Wood, the former
chief executive of Prudential’s UK life business, with backing from Deutsche Bank.
Lucida was founded at the end of last year
by Jonathan Bloomer, former chief executive of the Prudential. Synesis Life, another
2006 launch, is headed by a group of former
senior Prudential managers.
In addition, there is The Pension
Insurance Corporation, founded by Duke
Street Capital, the private equity firm
headed by Edmund Truell. AIG, Citigroup,
Aegon, Aviva, Scottish Equitable and

Goldman Sachs all have offerings, too.
While many of them go head-to-head
in pitches for new business, most claim
to offer a niche service that will win them
significant market share. Citigroup, for
instance, eschews the normal practice of
using scheme assets to buy annuities. It has
decided to manage the schemes it buys as
ongoing concerns. It does this by buying
the sponsoring company in its entirety and
then selling on the operating company and
retaining the pension scheme. This was the
model for Citigroup’s August 2007 buyout
of Thomson Regional Newspapers’ pension
fund. Scheme members have effectively

swapped the Thomson covenant for a
Citigroup covenant and now have recourse
to Citigroup’s considerable balance sheet as
a safety net.

them too expensive to effect. Today, some buyout
vehicles allow payments to be spread over, say, five
years. If the total cost of the buyout is £100m, the
company may pay £50m up front and £10m a year for
five years. Companies are starting to consider partial
buyouts too. “You can just take a block of lives out of
the scheme,” says Mr Clack. “It doesn’t have to be an
all or nothing approach.”
Despite the mushrooming of providers and
strategies, most respondents said that they were
unlikely to attempt a buyout. Just 19% intended to
transfer liabilities to an insurance company over the
next three years. Slow take-up is rooted in long-term
structural issues—one of the main barriers cited was
concern about reputational damage should the third
party fail to meet its obligations.
In addition, a significant proportion believes that
the economic cost of buy-outs is too high. Bruno
16

© The Economist Intelligence Unit 2008

While it is novel, not everyone is
convinced by the strategy. Mr Clack at
Prudential, says:

“The acquirer still has to honour the
liabilities so it is not clear where returns
will come from. Perhaps they are planning
to take a share of any surplus, if that is
allowable.”
Aegon also claims a unique selling point
in its joint venture with investment bank
UBS. Its idea is to transfer scheme risk
gradually, automatically buying annuities
if and when funding levels improve. UBS
is responsible for managing the assets
to try to produce the returns needed to
execute the next annuity purchase. Aegon
admits the market is crowded but believes
there will be a shake-out. Colin Beattie,
head of Aegon Trustee Solutions, says:
“Some players have been around for a year
and won no business because they have
overestimated the money available in the
market in the short term.”

Paulson, analyst with Bernstein Research, estimates
that the cost to a company to make the transfer is
equivalent to about 30% higher than the number it
must legally report on its balance sheet. Some, such
as Mark Wood, chief executive officer of Paternoster,
one of the new breed of bulk annuity buy-out players,
dispute this figure, but even Mr Wood acknowledges
that the perception of a high premium has dampened
corporate enthusiasm for bulk annuity transfers.

One company that has looked at buy-outs but is
currently adopting a wait-and-see approach is StoltNielsen, the UK shipping firm. “We keep watching
that market, but it’s just not deep enough right
now,” says Homiyar Wykes, group financial controller
at the company. “Unless you are keen to do it for
very pressing reasons like a management buyout or
a takeover, it’s not a cheap way to hand over your
liabilities.”


A way through the maze
The challenges of managing UK pension schemes

CASE STUDY

Seddon Atkinson
Competition comes to pension buyouts
In 2006, when Fiat subsidiary Iveco decided
to close part of its UK heavy truck division,
Seddon Atkinson, the company had to find
a home for the pension plan, which covered
some 2,000 current and past employees.
It should have been a relatively
straightforward transfer to one of two big
UK insurers, Prudential or Legal & General,
which had cornered the market on pension
buyouts. The fund itself was healthy—
sometimes running a small surplus—but
because the company was shutting down, UK
law forced Iveco to make a suitable transfer.

The quoted price from one of the two
insurers, however, gave Mike Blackmore,
who was finance director at the time, reason
to pause. It came in at 80% higher than
estimated prices and far higher than the
amount for which he had budgeted, and
this was a cost that Iveco would have had to
swallow in its profit and loss.

“It gave me severe indigestion,” says Mr
Blackmore, who has since become finance
director for Ceridian, a UK payroll and HR
outsourcing company. “The fact that there
were only two people in the market caused
us some grief. We booked the bad news
when we announced the closure based on
the actuary’s estimate, and then found out
we had a lot more bad news. It didn’t make
me very popular at headquarters in Turin.”
Fortunately for Iveco, the market for
pension buyouts, or bulk annuities, was
in the midst of a big shake-up because of
changes to UK pension regulations, with
several start-ups challenging the two
established players. Although the start-ups
were primarily after business from solvent
companies, Blackmore started to get quotes
for buying Seddon Atkinson’s scheme.
“Suddenly we started getting some
competitive quotes, and we were able to

Mr Wykes is confident that the company can predict
cash requirements pretty accurately for the next five
years, and reckons that the cost will be far less than
the current price for a transfer. “If we do want to pay a
30% premium, why don’t we just put that money into
the pension fund?” he asks.
Another reason preventing buy-outs, cited by
the survey respondents, was that trustees might be
reluctant to support buyouts, although Prudential
disputes this. “Trustees are there to make sure a

drive them down by playing one off against
the other.” In the end, they went with one
of the start-ups, Paternoster, for a price very
close to Mr Blackmore’s original budget.
With more offers to choose from, it
was not necessary to delve into the detail
of actuarial tables and life expectancy.
Mr Blackmore could focus on the bottom
line—price. Having the right data to hand,
however, helped Paternoster to make
calculations that ultimately drove down the
quote. “The fewer assumptions they have to
make the better,” says Mr Blackmore. “They
all adjusted their price according to the
additional data when it came in.”
Are bulk annuities for everyone?
Blackmore understands why CFOs who aren’t
forced to transfer their funds might wait

until the price drops even further. “It’s a
big decision to make because it’ll cost you a
lot of money today when the probable bad
news will happen a long time in the future,
based on probable improvements in life
expectancy,” Blackmore says. “I personally
believe it’s the right thing to do in the long
term. It’s better to bite the bullet now.”

scheme is well run. Any action that can secure benefits
is looked on favourably,” says Mr Clack.
While widespread approval of buyouts may be
some way off, the expanding market is convinced
that enticing opportunities do exist. As Mr Mody says:
“These guys don’t need much activity in the market to
do well. They are playing in an industry with £1 trillion
of assets and billions of pounds could be available in a
single prize. That’s worth waiting for.”

© The Economist Intelligence Unit 2008

17


A way through the maze
The challenges of managing UK pension schemes

Conclusion

While no one knows the exact shape of pension

provision in years to come, the one certainty is
that it will have evolved significantly. The stakes
are too high for the status quo—in which pension
schemes represent a largely unrewarded risk for
companies—to remain. The search for new financial
wizardry to combat demographic and macroeconomic
risks is likely to bear further fruit. The drive for
better governance is unstoppable and the controls
put around investment strategy and funding will
inevitably tighten.
But, in the final analysis, it is likely that many
companies will baulk at the expense and complexity

18

© The Economist Intelligence Unit 2008

involved in implementing these solutions. Many
already have the sneaking feeling that in trying to
bolt every door, they will fail to notice when the
roof blows off. Given these concerns, many finance
departments will insist on taking as much uncertainty
out of the equation as possible. This may lead to
greater take-up of LDI solutions, but companies
could well head down the more radical path of closing
or selling off their pension schemes. This ultimate
transfer of risk may not delight employees and
unions, and it may be expensive in the short-term,
but at least executives and trustees will sleep better
in their beds.

Appendix: Survey results
A way through the maze
The challenges of managing UK pension schemes

Appendix
In August 2007, The Economist Intelligence Unit surveyed 200 board level, or C-level, executives of UK companies
from a wide range of industries. Our sincere thanks go to all those who took part in the survey. Please note that not
all answers add up to 100%, because of rounding or because respondents were able to provide multiple answers to
some questions.
Over the past three years, how do you think the risks associated
with managing your organisation’s pension scheme have
changed?

Which of the following do you consider to be the most significant
risks to your organisation from your pension scheme?
Please select up to three.

(% respondents)

(% respondents)
Regulatory changes affecting pension funding
Increased significantly 32
Increased slightly

32

No change

26

Decreased slightly

8

Decreased significantly

2

48

Changes to mortality assumptions
47

Volatility of equities
40

Volatility of future inflation expectations
36

Potential future accounting changes
26

Reductions in expected future investment earnings due to changes in asset strategy
25

Increasing deficits
21

Volatility of long-term bond yields
20

Restrictions on desired corporate activity arising from regulatory changes

Do you think that optimising your pension scheme’s risk
automatically leads to lower levels of risk?

17

(% respondents)

No

51

Yes

39

Don’t know 10

Which of the following aspects of your pension scheme
management are you most keen to improve in the next year?
Please select up to three.
(% respondents)
Understanding of funding options (eg, use of contingent assets)
42

Understanding impact of long-term trends (eg, changes to longevity)

36

Asset allocation
35

Response to regulatory change
32

Performance management of fund managers
28

Understanding of investment trends
24

Management of interest rate and inflation risk
20

Relationships with members
19

Relationships with external advisers (eg, investment consultants and asset managers)
19

Speed of reaction to changes in capital markets
17

Other
3

© The Economist Intelligence Unit 2008

19


Appendix: Survey results
A way through the maze
The challenges of managing UK pension schemes

How successful do you think the following strategies are at reducing the negative impact of pension scheme risks on your chosen
measure? Please rate 1 to 5 where 1 is very successful and 5 is not at all successful.
(% respondents)
1 Very successful

2

3

4

5 Not at all successful

Don’t know

Benefit design changes
24

30

23

13

3

8

Liability-driven investment
23

20

30

9

4

13

Governance changes to improve decision making and control of pension issues
21

39

20

11

3

6

Use of derivatives or structured products to manage interest rate and/or inflation risks
20

26

29

11

4

10

Use of derivatives or structured products to manage equity risks
17

27

28

15

4

9

Bulk annuity buy-outs
17

21

26

14

8

14

3

14

Use of contingent assets, guarantees and other credit support tools
16

28

27

12

Alternative assets, such as private equity and hedge funds
14

24

31

16

7

8

How successfully do you think your organisation manages the following aspects of scheme governance?
Please rate on a scale of 1 to 5, where 1=Very successfully and 5=Not at all successfully.
(% respondents)
1 Very successfully

2

3

4

5 Not at all successfully

Managing relations between trustees and the corporate sponsor
27

36

27

7

3

Setting and monitoring investment strategy
26

41

22

9 1

Managing administrative aspects of scheme management
25

36

27

9

3

8

3

Putting in place a formal process to identify risks
25

38

25

38

26

Monitoring risks on a regular basis
29

71

Speed of decision making and execution
23

31

26

15

6

Manager selection
20

40

26

11

2

Measuring performance of asset managers
20

36

27

12

4

Enhancing trustee competencies
19

31

36

11

3

Measuring performance of investment consultants
18

33

33

11

5

Measuring performance of trustee board
16

20

© The Economist Intelligence Unit 2008

32

30

16

6


Appendix: Survey results
A way through the maze
The challenges of managing UK pension schemes

Which of the following strategies have you used in the past three years, and which do you intend to use in the next three years?
If you have no intention of using a particular strategy, please select “Do not intend to use”.
(% respondents)

Already in place

Intend to use in next 3 years

Do not intend to use

Closure of defined benefit scheme to new members
46

22

31

Increased employee contributions
37

37

26

Special employer contributions
35

40

24

Transfer of liabilities to life insurance company
20

19

61

Closure of defined benefit scheme to future accrual
19

31

50

Transfer of liabilities outside of traditional insurance sector
17

23

60

Use of derivatives/ structured fixed interest products to hedge inflation/ interest rate risk
17

39

44

Liability-driven investment approaches
14

41

46

Use of contingent assets to support scheme funding
8

38

54

Which of the following corporate performance measures is most
affected by risks associated with your pension scheme?
Please select one.
(% respondents)

If your organisation’s senior management could transfer all or
some of the organisation’s liabilities to a third party at a
competitive price with the full support of stakeholders, do you
feel they would choose to do so?
(% respondents)

Balance sheet

43

Cash flow

25

Earnings (per share)

21

Credit rating

11

Yes, they would
transfer all of our
liabilities

18

Yes, they would
42
transfer some of our
liabilities
No

40

© The Economist Intelligence Unit 2008

21


Appendix: Survey results
A way through the maze
The challenges of managing UK pension schemes

What is your current asset allocation, approximately?

(% respondents)
0-19

20-39

40-59

60-79

80-100

Average allocation (%)

Equities
8

36

30

23 2

41

Bonds/Gilts
15

39

27

17

3

36

9 11

16

11 1

6

94

6

3

94

4 2

4

10

5

4 1

5

Property
57

32

Private equity
88

Hedge fund (specialist trading approaches)
Hedge fund (long/short equity style)
Commodities
90

Other
93

In the next three years, what changes do you expect to your asset allocation? If you do not use a particular asset class and have no
intention of doing so in the next three years, please select “Not applicable”.
(% respondents)
Greater allocation

No change

Smaller allocation

Not applicable

Equities
17

52

26

4

Bonds/Gilts
18

55

21

6

Property
17

44

15

24

Private equity

22

30

8

40

Hedge fund (specialist trading approaches)
17

22

10

51

9

51

Hedge fund (long/short equity style)
15

25

Commodities
11

29

11

49

Other
3

25

7

65

Approximately how many members are there in your pension schemes?
(% respondents)
Fewer than 500

500 to 1,000

1,000 to 5,000

5,000 to 20,000

+20,000

Active
37

15

18

17

13

Deferred
43

23

19

10

5

6

6

Pensioners
52

22

© The Economist Intelligence Unit 2008

22

14


Appendix: Survey results
A way through the maze
The challenges of managing UK pension schemes

In the current environment, which of the following do you think
are the most significant barriers to prevent companies from
transferring their liabilities to third parties?
Please select up to three.

What is the current status of your main (largest) defined benefit
pension scheme for current employees?
(% respondents)

(% respondents)
Reluctance of trustees to support such deals
51

Reputational damage if third party fails to meet obligations
51

Economic cost of buy-outs is too high
44

Responsibility of sponsor to scheme members
36

Open to existing
employees but
closed to new
entrants

55

Open to all
employees

31

Closed to all
employees

15

Lack of market development
24

Internal buy-in challenge
22

Impact on credit rating
18

Unfavourable market reaction

What is the value of your total pension funds’ assets?

14

(% respondents)

Impact on earnings
13

Other
2

What is the size of your organisation’s liabilities in relation to
its market capitalisation? Please choose the option that you think
most accurately reflects your scheme.

£500m or less

44

£501m to £1,000m

16

£1,001m to £2,000m

18

£2,001m to £5,000m
£5,000m +

9

13

(% respondents)
Between 1% and 10% of market capitalisation
32

Between 11% and 20% of market capitalisation
29

Between 21% and 30% of market capitalisation
25

Between 31% and 40% of market capitalisation
6

Between 41% and 50% of market capitalisation
3

50% of market capitalisation or more
6

© The Economist Intelligence Unit 2008

23


Appendix: Survey results
A way through the maze
The challenges of managing UK pension schemes

About the respondents

What are your organisation’s global annual revenues
in US dollars?

What is your primary industry?
(% respondents)

(% respondents)
Financial services
21

Manufacturing
11

Professional services
10

Consumer goods
8

IT and technology
7

$500m or less

29

$500m to $1bn

25

$1bn to $5bn

20

$5bn to $10bn

10

$10bn or more

15

Energy and natural resources
6

Healthcare, pharmaceuticals and biotechnology
5

Construction and real estate
5

Entertainment, media and publishing
5

Government/public sector
4

Automotive

3

Logistics and distribution
3

Chemicals
3

Transportation
3

Education
2

Agriculture and agribusiness
1

Which of the following best describes your title?
(% respondents)
CFO/Treasurer/Comptroller/Finance director
47

CEO/President/Managing director
23

Other C-level executive
18

CHRO/HR Director
8

Other
5

Telecoms
1

Whilst every effort has been taken to verify the accuracy
of this information, neither The Economist Intelligence
Unit Ltd. nor the sponsor of this report can accept any
responsibility or liability for reliance by any person on
this white paper or any of the information, opinions or
conclusions set out in the white paper.
24

© The Economist Intelligence Unit 2008