Aon Hewitt: De-Risking Tops Priorities Among European Pensions

(July 5, 2011) — European pension schemes are planning to de-risk, according to new research by Aon Hewitt.

Its findings — outlined in its Global Pension Risk Survey 2011 — revealed that pension funds around Europe have placed de-risking at the top of their list of priorities. The survey discovered that more than half of respondents are looking to fund their deficits solely through employer contributions. Meanwhile, the survey noted that risk is being taken in a more sophisticated way than in previous years; today, employers are seeking alternative asset classes to provide higher returns with lower risks.

Furthermore, a quarter of respondents have no policy regarding interest rate or inflation risk hedging.

Spurred by increasing life expectancy and regulations pressure, the urgency to de-risk is prevalent among pensions worldwide, reflected in a study last year by MetLife which showed that sponsors and trustees are struggling to develop strategies for managing longevity risk.

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“While it’s apparent that scheme sponsors and trustees show a good understanding of the impact that longevity risk poses to their schemes and their organisations as a whole, they seem unable to manage this important risk on their own,” said MetLife Assurance chief executive Dan DeKeizer in the company’s UK Pension Risk Behaviour report.

DeKeizer said that part of the reason scheme sponsors and trustees have faced obstacles managing longevity risk on their own has been due to a lack of understanding regarding available options.

MetLife’s UK pension risk behavior index analyzed how 89 trustees and sponsors viewed 18 investment, liability and business risks that impacted their pensions. The research studied how well those schemes felt they were handling their risks. A majority of respondents acknowledged that “despite an estimated £1 trillion of assets being exposed,” they had failed to manage longevity risk successfully.

More recently, a study last month by Allianz Global Investors revealed a different order of priorities among European schemes, with interest rate risk topping concerns. Among pension funds and other institutional investors in Europe, government credit risk ranked as the second-biggest threat to investments. Of the 156 respondents surveyed, about 47% of respondents cite government credit risk as a considerable risk and about 15% as a huge risk.

Perception of risk varied by location, the study showed. Investors in Austria, France and Italy are most concerned about sovereign debt risk largely as a result of bailout packages granted to Greece, Ireland and Portugal. Meanwhile, British and Scandanavian investors view declines in market prices as well as interest rates as the main risks.

The perceived threat of inflation among European investors was also reflected in a Mercer survey in May that showed European pension funds are buying inflation-protected instruments to guard their portfolios from increasing inflation. The investment consultancy’s annual European Asset Allocation Survey of more than 1,000 European pension funds with assets of over $812 billion found that compared to last year, an overwhelming 80% of respondents are now more concerned about the threat of rising inflation.

“Protection, through acquiring inflation hedging assets (such as inflation bonds and swaps), looks to be expensive and there is a risk that such investments provide ‘insurance’ for events that never actually happen,” Tom Geraghty, Mercer’s head of investment consulting for Europe, Middle East and Africa, commented in a statement. “Pension funds also need to understand the extent to which their liabilities are affected by higher inflation. In some cases, inflation caps may mean that higher inflation is less negative for pension schemes than might be expected,” he said, noting that it is imperative that schemes understand how their liabilities are impacted by various inflation scenarios.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Norway's oil fund -- the Government Pension Fund Global (GPFG) -- has agreed to form a joint venture to buy $1 billion of real estate assets in Paris from AXA.

(July 5, 2011) — Norway’s $584 billion sovereign wealth fund has agreed to purchase $1 billion of Paris property from French insurer AXA.

The deal represents the fund’s second major real estate investment in less than a year.

As part of the sovereign wealth fund’s plan to add a minimum of $25 billion in real estate assets to boost returns, the fund said it would pay roughly $1 billion for 50% of seven properties in and around Paris from AXA. The deal would give the fund ownership of 156,000 square meters (1.68 million square feet) of mainly office properties. The fund anticipates that the transaction will close in the third quarter.

Commenting on the joint venture, Karsten Kallevig, Norges Bank Investment Management’s Chief Investment Officer Real Estate said in a statement: “This acquisition enables us to gain a significant exposure to the Paris office market, one of our key European target markets. We look forward to a long and beneficial partnership with the AXA Group.”

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Pierre Vaquier, Chief Executive of AXA Real Estate, added: “To enter into a joint venture with such a highly regarded investor as Norges Bank is a clear endorsement of AXA Real Estate’s standing in the European real estate market and its ability to work with world class real estate investors, as well as highlighting of the quality of the properties in its Paris office portfolio. The Joint Venture will allow AXA France Insurance Companies to reallocate capital and diversify into other European markets, especially the UK and Germany, while maintaining exposure to this important market by retaining a significant stake in the Joint Venture. We will continue to manage the portfolio and look forward to working with Norges Bank in this exciting partnership.”

In March, the fund obtained approval to transition away from bonds and put 5% of its capital into real estate to help it meet its 4% annual return goal. The move reflects efforts by Norway’s government-run oil fund to increasingly invest in real estate, infrastructure and other assets that have been viewed as hedges against inflation.

“Most investors these days have some concerns about inflation,” Dag Dyrdal, Chief Strategic Relations Officer at NBIM, told aiCIO in March. “With 60% in equities and 40% in fixed-income, we still think we’ll be able to achieve our expected return even if fixed-income underperforms,” he said. While the fund has traditionally been solely invested in public equity, fixed-income, and, more recently, real estate, Dyrdal indicated that the realistic fear of higher inflation could push the government to further diversify the fund into real estate, infrastructure, and private equity for protection of the real return.

Dyrdal added that the fund aims to continue its expansion into real estate at the expense of fixed-income, with a target of building a $25 billion real estate portfolio. “We just made our first investment in the UK, and the further real estate expansion will be gradual and conservative, with no time limit,” he said in the March interview. This year and next year, the fund will look toward investing in property in other major European markets — in the UK, France, and Germany — and will eventually look toward markets in other areas inside and outside of Europe. “Overall, allocation is decided by the Ministry of Finance, which seeks stable and long-term returns. For a fund of this size, it’s not easy to apply tactical applications,” he said.

Norges Bank — commonly known as the oil fund — made its first real estate investment for the Norwegian GPFG, acquiring a 25% stake in The Crown Estate’s Regent Street portfolio in London in March 2010. Norway agreed to spend about $722 million for a 25% stake in the UK Crown Estate’s Regent Street properties in London — consisting of properties located on Regent Street.

“A move into real estate will strengthen the fund, which today is solely invested in stocks and bonds,” Yngve Slyngstad, chief executive officer of Norges Bank Investment Management (NBIM), said in a statement.

Other pensions and sovereign wealth funds have taken advantage of real estate investments worldwide. Sovereign wealth funds from countries including Qatar, Dubai and China have invested in London real estate to benefit from the market’s strength and the pound’s weakness. And in one of its latest effort increase its overseas allocation, South Korea’s National Pension Service (NPS), the world’s fifth-largest pension with $263.4 billion in assets under management, revealed plans to invest $400 million in the Asian and Australian real-estate markets.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742