Canada, Europe Lead List of Most Responsible Asset Allocators

Canadian and European funds lead the way among the most responsible asset allocators, according to a new report from non-partisan think tank New America.

The recently released Bretton Woods II Leaders list of the 25 “most responsible” asset allocators was culled from among hundreds of sovereign wealth funds (SWFs) and government pension funds (GPFs) representing more than $20 trillion in assets under management. The top funds were chosen for their “high conviction in responsible investing,” and their belief that “ESG is material to long-term returns,” according to New America.

The group was then screened for availability of information, minimum size of assets, and investment activity, which resulted in a final list of 121 SWFs and GPFs, comprising $15 trillion in assets. Each of the 121 asset allocators was rated by two to three independent expert reviewers, until the list was whittled down to the 25 highest-scoring SWFs and GPFs.

Although Canada had the highest representation, claiming six out the top 25 funds, and another nine were from Europe, the leaders list was rather diversified, and included funds from Brazil, South Korea, and South Africa. New America said one main characteristic of the leaders is that they “are constantly looking for ways to improve and deepen their responsible investing programs and they are committed to learning from peers and sharing their insights.”

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The leaders include 18 GPFs and seven SWFs with a total of $4.95 trillion in combined assets, and individual funds ranging from $10 billion to $1 trillion in assets. According to New America, the combined asset base of the group is larger than the GDP of every country in the world except the US and China.

Among the largest funds represented on the list were Norway’s $981 billion Government Pension Fund – Global; the Netherlands’ $532 billion APG Groep; South Korea’s $522 billion National Pension Service; and the $332 billion California Public Employees’ Retirement System (CalPERS). The only other US fund to make the list was the $192 billion New York State Common Retirement Fund.

The report also provided “recommendations for success” identified by the leading asset allocators, which included:

Understand the non-traditional financial risks that could impact long-term value creation in your portfolio, and make sure those risks are properly priced and addressed.

Develop a culture of transparency, and continually refine your communication protocols. If you don’t communicate your responsible investing principles and investment framework effectively, it will limit your chances for success.

When it comes to implementation, begin with the tasks that are easiest for your organization, such as introducing ESG into the due diligence process for private equity.

Make sure the companies you invest in know what they are doing, operate with a long-term perspective, understand both traditional and non-traditional risks, and price and address those risks properly and consistently.

Tags: ESG, Government Pension Fund, New America, Sovereign Wealth Fund

The number of defined benefit pension plans reporting a funded status of more than 101% increased by 10% in 2017, according to a recent survey from investment consulting firm NEPC.

The NEPC’s 2017 Defined Benefit Plan Trends Survey reported that 19% of respondents were over-funded, which is up from 9% last year, and is at its highest level since the first survey was conducted in 2011. As a result, the percentage of plans surveyed who reported that they were funded less than 101% decreased to 81% from 91% last year.

The survey also found that among the over-funded plans, 65% invested in alternatives, and 55% used liability-driven investment strategies, with a majority of users implementing derivatives.

The NEPC said the rising variable rate premiums required by the Pension Benefit Guaranty Corporation (PBGC) had a significant influence on the improved funded status when deciding how to de-risk portfolios. Some 80% of plan sponsors said they will make changes to their plan strategy in the next six months, and of those who said they would, partial risk transfers (34%), and higher contributions (24%) were the preferred strategies named. The number of respondents saying they would seek partial risk transfers was up 15% from the 2016 survey, while the number of funds saying they would seek higher contributions increased by 5%.

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“The PBGC rate premium decision has had a major and lasting impact on plan sponsors and their strategies,” said Brad Smith, partner in NEPC’s Corporate Practice. “Not only have we seen an increase in over-funded plans to help hedge against these premiums, we’re also seeing plans accelerate the de-risking process. With so much at stake, we don’t expect plan sponsors’ anxiety toward rate premium increases to subside.”

The survey also said that the use of liability reduction strategies decreased 12% this year to 75%. In 2016, 87% of plan sponsors considered or implemented lump-sum payouts, the most popular choice. The NEPC said this decrease is likely a result of plans having seen diminishing returns from the payouts. When asked if they’d consider lump-sum payouts over the next six months, only 22% of plan sponsors said they would.

The NEPC survey was conducted online in August by the firm’s corporate defined benefits practice, which questioned 143 plan sponsors, including NEPC clients representing approximately $169 billon in defined benefit assets. The median plan assets among respondents was $750 million, and the average plan assets was $1.2 billion.

Tags: Defined benefit (db) pension plans, NEPC, Pension, Survey

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