Aviva Pension Seeks Real Estate in Move Toward Liability-Matching Assets

(March 18, 2011) — Seeking long-term, liability matching assets, the $13.6 billion Aviva Staff Pension Scheme is aiming to up its allocations to real estate-related assets to 15% over the next two years.

The decision by the fund reflects the improved status of the sector following the financial downturn. “We had about a 40% drop in property valuations from its peak in 2007 to the bottom of the cycle which occurred in the beginning of 2010,” Mercer’s Allison Yager told aiCIO. “Since then, investors have returned to the real estate market and made sizable commitments, but there’s no way to know if we’ll ever return to the pre-crisis peak.”

Yager noted that she is witnessing more and more clients express interest in having an allocation to real estate in an effort to achieve greater diversification.

David Emerson at consultancy LCG Associates questions relying on real estate to hedge against liabilities. “In general we wouldn’t use real estate as a hedge against liabilities, we would use fixed income,” he told aiCIO, noting that while real estate could provide a steady source of income, it doesn’t quite fit the bill for liability-matching that pension funds are looking to achieve.

Aviva’s pension scheme invests 30% in growth assets and 70% in liability-matching assets, with the amount currently invested in real estate-related assets far below the 15% target, according to Global Pensions. The move toward more liability-matching assets is part of a strategy presented to trustees by Aviva Investors – the REaLM (return enhancing and liability matching assets) strategy, and the fund will likely increase its exposure to real estate-related assets through Aviva Investors’s REaLM funds. “We are developing our REaLM strategy alongside Aviva Staff Pension Scheme and its adviser. ASPS announced last year the imminent closure to future accrual of its defined benefit section, making it a very mature scheme. Aviva Investors REaLM strategy fits well with the scheme’s need for long term assets yielding a margin over gilts without introducing significant risks, and is reasonably well matched to its liability profile,” Field told the news service.

In other signs of a real estate rebound, the Government of Singapore Investment Corp. (GIC), which manages more than $100 billion of Singapore’s foreign reserves, offered $1.5 billion for a group of bankrupt resorts owned by investors that include the hedge fund Paulson & Co. Along with signaling renewed confidence in real estate investments, the purchase by the GIC, ranked as the world’s seventh-largest state investment company by the Sovereign Wealth Fund Institute, reflects heightened faith in a rebound in travel demand following the recession.