As I am spending more and more time on the institutional side of the business in recent years – as part of the overall theme of multi-convergence in the industry -, I am always intrigued with the work done by Aon Hewitt.

(Btw, they also have a great research app, “HRevolution”).

In their big picture annual “hot topics in retirement”, the group highlights important data points and client themes.

Investments: on the investment side pension plans focus on investment advisory and income solutions. For DC plans, target optimization for investors alongside education and tools, often around plan design and automation tactics are on the forefront. For DB plans, risk and volatility management remains the overarching concern (see also my upcoming global analyst column in aiCIO on LDI and long duration bonds).

Operations: most institutional investors are conducting a review of funds and fees, with growing external support as part of restructuring and compliance.

Fundamentally, the biggest concerns for the industry are employee readiness for retirement as well as target policy return targets of around or above 8% and expectation management if those targets are becoming less and less realistic. Only 4% of plans are very confident their employees will retire with sufficient assets, down from 30% in 2011. Similarly, only 10% of plan sponsors feel very confident that their employees will take accountability for their retirement.

On risk management, 53% of plan sponsors hired a third party to monitor or review fund options, and 36% have lowered costs by changing some or all funds from mutual funds to institutional funds.

This is a curious area for the business, with ongoing convergence. Overall, more institutions are using either mutual funds or institutional funds instead of SMAs to reduce costs and increase transparency.

For plan design, 69% of pension plan sponsors are very likely to continue their current plan, 14% of plan sponsors are likely to freeze accruals, and 18% are likely to close their plan to new entrants.

Alarmingly, 86% of plans were underfunded as of 2011, and 23% are conducting asset liability studies. The problem here of course is that fully funded plans have the option to move to longer duration to match their liabilities, while the many underfunded plans risk further undermining their funded ratio by going long now in case interest rates rise. Also, by shifting towards liabilities, the return picture at a prudent level of risk – assuming only limited leverage – is even less favorable.

There are many interesting concepts on the table, from risk-parity and factor-based investing to smart beta, alternatives or global equities and emerging markets, but education, communication and a new deal on retirement expectations globally is needed.

A new normal indeed.

I invite you to follow me on twitter @danenskat

(c) Enskat Associates 2012