Only a fifth of pension schemes use funding triggers, even though these tools could result in better funding levels 70% of the time, according to research by consultancy Aon Hewitt.
Funding triggers automatically shift a scheme's asset allocation once a threshold is reached in the scheme's funding level, for example, by reducing a scheme's allocation to growth assets by ten percentage points once the funding level reaches 80%.
Aon Hewitt examined five-year periods in the last 20 years and found that schemes would have been better off with funding triggers in 70% of cases. Although there were variations for different scheme types and strategies, the result was “broadly consistent”, it said.
In some cases, the gains were dramatic. A fifth of the time, scheme funding levels would have been at least 5% higher as a result of having funding triggers.
However, funding triggers were not always helpful. In 20% of cases, schemes would have been worse off because of their funding triggers. These “were all cases where the scheme had performed very well, but could have done even better had it not acted on the trigger,” said Paul McGlone, principal and actuary at Aon Hewitt.
“Effectively, this was during bull markets where triggers correctly confirmed that a scheme could afford to sell its growth assets. However, had it held on to them a little longer, it could have seen further improvements.”
In about 10% of cases, the funding triggers had no impact because they would not have been triggered.
Aon Hewitt said funding triggers are growing both in popularity and complexity, with some schemes adopting “multi-dimensional” triggers, which respond to more than one market indicator. But with slightly less than a fifth of schemes using the tools, according to Aon Hewitt's research, there is scope for further expansion in future.
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