For those employees having a defined benefit pension plan, the ride ahead looks enjoyable; for all those having a defined contribution plan the ride is going to be less enjoyable while those without a type of pension, begin saving.
Those differences result from the type of pension funds being offered by employers, and the difficult challenge for the investment managers to create the advantages that have been promised.
“Pension funds are very much focused on their investment mix and changing that mix to isolate (themselves) from some of the volatility we have seen in the worldwide stock markets,” said Rob Baillie, head of State Street Canada, when referring to a key conclusion emerging from the annual survey of pension funds conducted by its Boston-based parent.
“The funds are diversifying some of the risk away and to try and generate returns which are hopefully stronger and not correlated towards the global markets,” added Baillie, noting greater exposure to alternative investments is one approach.
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Alternatives are a mixed bag and can include fund of funds hedge funds; property; private equity and infrastructure. About half the respondents within this year’s survey said they intend to increase their contact with those asset groups.
To reach its conclusions, State Street surveyed 400 funds (including about 40 from Canada) from 20 countries – 4 times the amount it surveyed the previous year – and accompanied with interviews with 43 industry experts from 13 countries. The funds ranged from $500 million (six per cent from the total) to more than $10 billion (22 percent.)
And the funds being surveyed have to make investment decisions against a background of tough economic fundamentals: an aging population means more retirees relative to contributing members; low interest mean liabilities compound at a faster rate than otherwise while volatile equity markets make the task of achieving returns even more difficult. However the managers’ job continues to be same: reach a funding level to 100 per cent and thereby ensure they can deliver on the pension promises.
In such an environment, the money is split around the level of risk to assume. The survey indicated about half the funds want to assume more risk as part of a plan to enhance returns so that they can narrow the so-called funding shortfall. The other half indicated they weren’t thinking about taking on more risk.
In contrast, one year earlier, State Street’s survey showed 77 percent of funds were keen to assume more risk next 3 years.
“The [short term] global volatility makes it challenging for pension funds to handle in the future,” noted Baillie, in explaining the big decrease in risk appetite. The attractiveness of alternative assets is another reason. “Infrastructure is perceived to be less risky and fewer correlated to the global markets,” noted Baillie.
Some Canadian pension funds have opted to consider risk, either investment or longevity, completely from the picture by buying annuities. Baillie noted some Canadian pension funds talked about pooling assets with another fund to attain economies of scale or a combination of expertise “to stronger position these to deal with the headwinds.”
But the survey indicated a minimum of two negatives from the heightened focus on alternative assets: the funds not have the necessary transparency to handle the danger; plus they don’t have the required expertise in the board level.
bcritchley@nationalpost.com
