For those employees using a defined benefit monthly pension, the ride ahead looks enjoyable; for anyone having a defined contribution plan the ride is going to be less enjoyable while individuals with no type of pension, begin saving.
Those differences derive from the type of pension funds being offered by employers, and the difficult challenge for the investment managers to produce the benefits that have been promised.
“Pension cash is very much centered on their investment mix and changing that mix to isolate (themselves) from some of the volatility we view in the worldwide stock markets,” said Rob Baillie, head of State Street Canada, when conversing of a vital conclusion emerging within the annual survey of pension funds conducted by its Boston-based parent.
“The money is diversifying some of the risk away and also to try to generate returns that are hopefully stronger rather than correlated for the global markets,” added Baillie, noting greater mention of the alternative investments is one approach.
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Alternatives undoubtedly are a mixed bag and can include fund of funds hedge funds; property; equity finance and infrastructure. About 50 % the respondents within this year’s survey said they plan to grow their reference to those asset groups.
To reach its conclusions, State Street surveyed 400 funds (including about 40 from Canada) from 20 countries – Four times the amount it surveyed the last year – and related to interviews with 43 skillfully developed from 13 countries. The funds ranged from $500 million (Six percent from the total) that has a lot more than $10 billion (22 percent.)
And the funds being surveyed have to make investment decisions against knowledge about tough economic fundamentals: a maturing population means more retirees according to contributing members; low interest mean liabilities compound quicker than otherwise while volatile equity markets make task of achieving returns difficult. Even so the managers’ job continues to be same: reach a funding level to One 100 % and thereby ensure they could deliver over the pension promises.
In this kind of environment, the cash is split round the amount of risk to visualise. Notebook indicated about Fifty percent the funds wish to assume more risk contained in an idea to boost returns to enable them to narrow the so-called funding shortfall. Another half indicated they weren’t considering coping with more risk.
In contrast, 12 months earlier, State Street’s survey showed 77 percent of funds were keen to visualise more risk next Three years.
“The [short term] global volatility can make it challenging for pension funds to deal with for the long term,” noted Baillie, in explaining the large reduction in risk appetite. The attractiveness of alternative assets is an additional reason. “Infrastructure is classified as being less risky and fewer correlated for that global markets,” noted Baillie.
Some Canadian pension funds have opted to consider risk, either investment or longevity, from the image by buying annuities. Baillie noted some Canadian pension funds discussed pooling assets with another fund to achieve economies of scale or even a combination of expertise “to stronger position these to deal with the headwinds.”
But notebook indicated no less than two negatives inside the heightened concentrate on alternative assets: the funds not have the necessary transparency to handle risk; and they also don’t have the required knowledge of the board level.
bcritchley@nationalpost.com
