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5 Ways Pension Funds Are Taking Action

Pension funds have been confronted with a series of challenges of late, but a new survey suggests they aren’t taking things lying down.

New research by State Street Corporation, based on responses from 400 pension professionals in 20 countries over a period of two months, found that pension funds will look to “own” five strategic retirement aspects this year:

Board training and education will be the focus of 2016

Funds believe that board expertise is not strong enough in critical areas and must be improved. Only 32% rate as “very strong” their board’s ability to think beyond short-term issues to address longer-term, strategic factors affecting the portfolio. Additionally, only 36% rate as “very strong” their board’s understanding of the risks facing the retirement fund, and a mere 38% believe their board has a high level of general investment literacy.

Nearly all (92%) of responding funds are planning to upgrade their governance model over the next 12 months, and roughly half (45%) are planning to increase training and education opportunities for board members.

Funds are transforming to meet future obligations, with a focus on ESG and alternatives

Most (83%) expressed moderate or high interest in environmental, social and governance (ESG) investments. Of those interested in ESG, 80% of respondents in North America and 78% of respondents in EMEA say they are more likely to appoint a manager with ESG capabilities.

Alternative investments are seen as key to boosting returns, with fund of hedge funds (51%) and real estate (50%) topping the list of planned increased investments — though 46% say they lack transparency on the risks stemming from alternatives.

Under pressure to cost cut, pension funds turn to asset pooling

Six out of 10 funds feel pressure to reduce costs, and 80% plan to merge retirement plans to boost efficiency and oversight. Benefits of consolidation cited were:

  • reduced costs (24%);

  • improved operational effectiveness (22%); and

  • high standards and consistency of governance (18%).

Pension plans face stark choices around risk

The survey found that appetite for risk is essentially split down the middle, with 36% of pensions saying they are ready to take on more risk, while 45% are actively looking for ways to decrease the amount of risk in their portfolios. Regardless, no more than one in five funds rate themselves as highly effective at managing key risk areas, including investment and liquidity risk.

Insourcing trend continues, but external advisors are still vital to success

According to the survey, funds are ramping up their internal specialist talent, with nearly half planning to increase their internal risk teams (48%) and investment teams (45%) over the next three years, particularly as they gear up for increased ESG investing. However, 65% of all funds agreeing that their consultants are essential to guiding their investment process.

On behalf of State Street, Longitude Research, a global research firm, conducted the survey of institutional asset owners in October and November of 2015. The survey garnered 400 responses from pension fund professionals, spanning both defined contribution and defined benefit assets across 20 countries. Over half (68%) of respondents came from private sector pension systems, 25% from public sector pension funds and 7% from superannuation funds.