A Blackrock survey reveals corporate and public sector defined benefit schemes are on increasingly diverging paths. Kim Kaveh explores the data.
Defined benefit (DB) pension funds are travelling towards two very different futures. This is driven by demographic change, and economic, financial and political currents, according to Blackrock's report - Common Challenges, Diverging Paths, published in March.
While most corporate DB schemes are closed to future accrual and new members, most public sector DB schemes are still alive and kicking.
For example, in the asset manager's survey of 300 senior executives of pension funds, nine out of 10 non-corporate plans were open to new members, compared with just one in 10 corporate plans.
Exactly half of the respondents were corporate DB funds, while 51% were non corporate.
Some 52% of plans were headquartered in America, 38% were in Europe, and 10% in Asia Pacific, and 37 UK DB pension schemes took part in the survey.
It sought to compare the changes underway in corporate plans which are winding down, with the evolution of public and other non-corporate schemes, which are seeking to "strengthen for the long run."
It showed that 65% of all 300 senior executives from both corporate and non-corporate schemes believed lack of financial recourses was the biggest barrier to changing their governance and investment policies.
Just under three quarters had created or revised a risk appetite statement in the last three years. This provides the amount and type of risk that an organisation is willing to take in order to meet its strategic objective.
Meanwhile, nearly three quarters (72%) said they had created or revised an investment belief statement. This articulates fundamental perceptions of trustees and their institutions on the nature of financial markets, and the role they play in these markets.
Furthermore, under three quarters (71%) of these respondents said they had "enhanced risk analytics," while 69% said they had enhanced their measurement and reporting of fees "in the last three years."
The survey found nearly three out of four (73%) corporate DB plans had a de-risking strategy in place. This includes four out of five plans in the USA, and nine out of 10 in the UK.
Some 89% of the largest corporate DB plans which had $25bn plus in AuM (£13.6bn) had a de-risking plan, compared with 42% of the smallest ones which had less than $10bn AuM.
Just over half of funds on a de-risking path said they expected their ‘endgame' would entail immunisation - which involves getting the plan to the point where it is self-sustaining—and "run-off on the balance sheet."
Meanwhile, 41% of chief investment officers pointed out that the potential appetite for risk transfer deals for corporate DB plans, "far exceeds the current capacity of insurers to take them on," and "demand for hedging instruments themselves may well outstrip supply as more funds move into run-off mode."
The survey further found 78% of corporate plans globally have taken steps towards cross-border coordination for their respective company's pension funds. Of those, some 39% said they had employed common investment strategies or managers, while just over a quarter said they had adopted a "common strategic asset allocation for some, or all plans."
Some 11% of participants said they had consolidated assets for corporate DB plans, and over a fifth (22%) said they did not expect to see any cross-border coordination.
Meanwhile, just 5% of those overseeing non-corporate plans said they had completed consolidation, and less than a fifth (17%) said they were "currently consolidating or have plans to do so" - at the time the study was conducted.
Some 64% of the total pool of respondents in both corporate and non-corporate DB cited 40% or more of their equities were managed through index funds. At the same time, more than a quarter (28%) managed 40% or more of their fixed income in index mandates.
Furthermore, just under three quarters of these respondents said they used factor-based investment strategies, and 61% said they used factors to help them understand portfolio risk and return.
It was reported that 70% of non-corporate plans had "adjusted guidelines to permit a new private asset class," and 65% added investment professionals to focus on private assets.
Blackrock asked participants to state how much they agreed with the following statement: "Environmental, social and governance criteria will play an increasingly important role in my organisation's investment decisions in the medium term."
Exactly one third of corporate plan senior executives strongly agreed, compared with 34% of non-corporates.
The largest gap was among those who neither agreed nor disagreed. This was the case for 11% of corporate pension plan senior executives, and 3% of non-corporates.
Participants were also asked to state how much they agreed with these statements: "Our organisation's defined contribution (DC) plan will be able to employ more investment strategies available to the DB plan," and "our organisation will offer a DC plan to our beneficiaries in the medium term."
The largest gap was found among one quarter of corporate plan senior executives who strongly agreed with the statement, compared with a third of non-corporates.
Meanwhile, some 2% of corporate plan senior executives strongly disagreed, compared with 5% of those overseeing non-corporate schemes.
Commenting on the survey results, Blackrock's head of institutional client business Edwin Conway said pension leaders today are on the front lines of a historic and urgent transition in how societies provide for retirement.
"Managing this changing environment, seeking efficient and higher-yielding investment styles and tackling challenges stemming from new regulatory and governance regimes will be key for both corporate and public pension schemes.
"While in many areas their paths are diverging, they both play a crucial role in reshaping global retirement."
He added both types of pension schemes continue to seek alpha, but with more selectivity and attention to where such strategies are best rewarded.
"It is not surprising to see the number of pension plans investing in factor-based strategies, given the variety available, but we expect to see further growth in the number of plans that are using factors to inform their asset allocation decisions," he said.
"Factors can be an important tool for pension plans in understanding their risk and return. The insight can be invaluable in determining which strategies are efficiently targeting plan goals, and which could be replaced by lower-cost, better-diversifying strategies."
He concluded the trend of rising allocations to private equity and credit, real estate and infrastructure seen over the past five years is continuing, as these funds seek diversification and potential premiums for bearing illiquidity and complexity risks.
Blackrock's report clearly demonstrates that corporate and public sector schemes are on increasingly diverging paths, which is reflected in their different approaches to investment and risk appetite.
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