Defined benefit (DB) pension schemes are taking an increased focus on de-risking their investment strategy, and raising their interest rate and inflation hedging ratios, according to Aon’s Global Pension Risk Survey 2021/22.

The survey suggested that “significant monies” was moving out of equities into less risky asset classes, with more than 50 per cent of respondents having reduced equity allocation over the past two years.

This was alongside an increased allocation to LDI, credit and increasing hedge ratios, with 75 per cent of respondents stating that they have rate hedge ratios above 80 per cent of the asset value.

The shift towards de-risking was attributed to improved funding levels, with the funding level of 75 per cent of schemes now higher than before the Covid-19 pandemic, according to the report.

However, Aon warned that finding the right balance between risk and return will be "critical" in an environment where most assets are at or near all-time highs, noting that around 63 per cent of respondents expect to depend on asset performance to reach their long-term goal.

De-risking was not the only shift in investment strategies, however, as nearly all (92 per cent) pension schemes have considered environmental, social and governance (ESG) factors in relation to their investments, with 20 per cent changing their investment as a result.

In addition to this, over 60 per cent of respondents either already, or are very likely to review climate-related risk with nearly 40 per cent expecting to set metrics and targets.

Aon partner, Callum Mackenzie, identified this focus on ESG as a "megatrend" that has been "shaping the investment landscape", suggesting that this may be a result of the increasing awareness of both regulatory shifts and the impact of climate change.

“But schemes are also supporting ESG considerations with action – a fifth of schemes have already made changes to their investments, having reviewed their ESG policies over the last two years," he continued.

"These steps have often involved moving to ESG benchmarks, screening out poor ESG holdings and focusing investment on assets that will make a positive impact on society.

“We believe that this is a trend that will continue, as 85 percent of respondents have either already reviewed or will review climate change risks in the next two years.

"They will look beyond the physical risks and be proactive, assessing how financial gains can be sought from the transition towards a lower carbon environment.”

In addition to this, Mackenzie suggested that, as climate risk becomes an integral part of investment decision-making, investors will introduce measures to help them make better decisions and gain a greater understanding of the impact of their portfolio.

Aon also drew attention to the role of illiquid assets when approaching buyout, noting that whilst 65 per cent of respondents expect to achieve their long-term objective within 10 years, illiquid assets are still popular among pension schemes.

“We are seeing schemes protect themselves from inflation and volatile market movements by opting for illiquid assets such as infrastructure (34 per cent) and real estate (32 per cent),” Mackenzie explained.

“Energy transition funds are also popular in this space. This makes it clear that pension schemes can certainly play a big role in the drive towards building an economic infrastructure for the future.”

Findings previously published from Aon's 2021/22 survey also revealed that more DB pension schemes are targeting self-sufficiency as their top endgame, rather than buyout for the first time since it was launched.

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