UK - Pension fund trustees are right to be risk-averse, according to consultants PricewaterhouseCoopers, despite research suggesting that alternative investments are set to pave the way in asset allocations.
PwC’s comments come in the wake of new research into occupational pension schemes by Deutsche Asset Management.
According to Deutsche’s study - which assesses the impact of the Myner’s review on institutional investment on the UK’s pension industry - hedge funds and derivatives such a futures mark the way forward in asset allocation, although trustees should still exercise caution with alternative investments.
But according to PwC, most trustees are still in favour of more conservative investments:
“At the moment, trustees seem to be heading towards less, not more, risk-taking. Anecdotal information suggests the current 75/25 equities/bonds is expected to fall to 45/55 over three to five years.”
Last year PwC issued a damning indictment on what it referred to as the investor “binge” on hedge funds, stating that the only way pension fund trustees can benefit from them is as “spectators”.
But Deutsche’s recent study highlights that absolute return strategies such as hedge funds have the advantage of being weakly correlated with traditional asset classes such as bonds and equities, making them attractive alternatives in optimal portfolio exercises encouraged by Myners’ Statement of Investment Principles.
In the case of futures, the pace of change is expected to be more rapid. Generally speaking futures contracts are high risk strategies, based on agreements between investors to buy or sell a specific amount of a commodity at a particular price on a stipulated date in the future. According to Deutsche, despite the reluctance of some trustees to employ the asset class, “in the new world the onus will be on them to explain why”.
The study also concludes that many occupational pension plans will want to make a major shift into private equity in current conditions, despite recent evidence to the contrary.
But despite Deutsche’s claim that private equity investment is not likely to see a major take-up this year, the take-up among local authority funds appears to be on the increase.
The London Borough of Brent has became the latest local authority scheme to consider such a move. The £1.25bn Norfolk County Council Superannuation has also said it is considering a 3%-5% allocation to the asset class. The pension funds for Nottinghamshire County Council, Cambridgeshire County Council and Lincolnshire County Council are also searching for private equity managers.
By Madhu Kalia
Mark Evans has been appointed as a director at Independent Trustee Services (ITS) to lead trustee appointments in London.
The Pension Protection Fund (PPF) is consulting on changes to the actuarial assumptions it uses in valuations in a bid to better reflect the bulk annuity market, with schemes set to move into surplus on aggregate.
Private sector defined benefit (DB) schemes were 96.3% funded on a Pension Protection Fund (PPF) compensation basis at the end of July, according to the lifeboat fund's monthly index.
Conduent has completed the sale of its actuarial and human resource consulting business to private equity investor, H.I.G. Capital.