Aon Investment Monthly – December 2018

Aon Investment Monthly is designed to provide you with some of our latest thinking and research, and to keep you abreast of the topical issues and challenges facing those working in the world of pension investment.

This month we look at transparency, bulk annuities and what risk means for DC savers. As we approach the end of what has been an eventful year, it is time to reflect. 2018 saw increased levels of uncertainty with Brexit dominating domestic concerns and increased protectionism, including US/China trade wars, having an impact globally. It is a challenging time for pension funds as markets enter what feels like a more volatile, transitional phase. This month we share some thoughts on three areas which have seen a lot of activity this year.

Following the FCA's Asset Management Market Study last year we now have the results from the group tasked with looking at cost disclosure, with templates released in November. This can only be a good thing for pension schemes, as with greater transparency comes greater accountability and in due course downward pressure on the costs of investing.

2018 has also seen a lot of activity in the annuity markets with both buy-in and full buy-out transactions. A buy-in is effectively just another investment and we have given some thought to when matching some benefits with an insurance policy makes sense from an investment perspective.

As the DC market continues to evolve, with increasing regulatory oversight, it is worth revisiting what we mean by risk in the context of DC investment. Traditionally, DC investments have targeted a combination of cash and bonds at retirement to match a cash lump sum and annuity purchase, but as more and more people take advantage of the flexibility offered by Freedom & Choice, it is worth revisiting the role of fixed income in a DC portfolio.

With no clarity on Brexit locally and continued trade disputes globally, the uncertainty looks to continue well into next year. We will continue to work to support our clients with navigating these challenging times. In the meantime, we wish you all the best for the coming holiday season. We hope you find these emails useful. We welcome your feedback and suggestions – using the contact details provided.

And so, on to this month's content:

Transparency Update

The Institutional Disclosure Working Group (IDWG) cost disclosure templates were released on 7 November 2018. These will standardise the costs reported by asset managers and provide the most comprehensive cost breakdown ever available to asset owners. This increased transparency will enable asset owners to better understand and query the overall costs incurred by their asset managers. Aon was delighted to be asked to form part of the IDWG and play a role in this initiative which we believe will be of benefit to the pension scheme community as a whole.

In conjunction with this announcement, a number of industry and Aon initiatives are available to support asset owners gather fee information from their fund managers and subsequently analyse the data collected. This will allow asset owners to be better positioned to challenge their fund managers on fees in future. Click here to read more.

Should trustees buy in bulk?

A bulk annuity contract provides regular contractual income in exchange for a one-off premium paid to an insurance company. Bulk annuities play a crucial role in pension schemes seeking to de-risk.

Aon's latest paper aims to:
• Define bulk annuities
• Identify the benefits to schemes
• Explain the use of annuities as a stepping stone to buy-out
• Discuss pricing

Refocusing what 'risk' means for DC Savers

A particular area we expect DC pension schemes to continue to develop and enhance are the investment options they offer to members. Refocusing what 'risk' means for DC savers should be at the heart of this. Christopher Inman has produced a client paper on this topic.