Pension funds are adapting governance models, changing investment strategies, cutting costs, and bringing asset management in-house to ensure better retirement outcomes, according to State Street’s 2015 Asset Owners Survey.
Governance is in particular need of an overhaul, the survey found, with 92% of the 400 global pension professionals questioned saying they will make at least some changes in this area in 2016.
“The investment team can play a greater role in improving the board’s knowledge.”Half of the respondents said they would adjust the balance of responsibilities between board and management, with 45% planning to increase training and education opportunities for board members. Just 38% of asset owners believed their boards had a high level of general investment literacy, while even fewer (23%) said their boards had the ability to accurately assess investment performance.
“The investment division within the pension scheme needs to be solid enough in the eyes of the board so that it can be relied upon to deliver the right information and advice,” said Antonio Iaquinta, State Street’s head of institutional business in Italy. “The investment team can play a greater role in improving the board’s knowledge.”
Other governance actions pensions planned for 2016 included changing the process for recruiting new board members, revising incentive models, and increasing transparency.
On the investment side, funds continued to shift to alternatives, with 51% planning to increase their exposures to funds of hedge funds. Half said they will up their real estate allocation, while private equity and infrastructure investments were targeted by 46% and 41%, respectively.
“Over the past years we’ve ramped up private equity, and to some extent hedge funds, and we’ve been doing a lot more private real estate,” said William Lee, CIO at Kaiser Permanente.
The majority of investors (83%) also expressed interest in environmental, social, and governance (ESG) investing, with 76% of those respondents more likely to consider hiring a manager with ESG capabilities than one without.
“We expect that a number of small pension funds will either decide to merge with other funds or choose administrative cooperation.”With 37% of defined benefit pensions in deficit amid global market volatility, respondents were also under pressure to cut costs. More than a third said they were planning to improve efficiency by pooling assets and liabilities with other pensions within the next three years. Others said they would share resources, such as staff.
“In the Danish market, we’ve seen funds coming together to reduce the costs of administrative functions,” said Jens-Christian Stougaard, director at PensionDanmark. “We expect that a number of small pension funds will either decide to merge with other funds or choose administrative cooperation, so they can stay independent but share their own administrative setup with either one or a couple of other funds.”
At the same time, 45% said they would expand their internal investment teams over the next three years, with 48% expanding their internal risk teams. However, with 65% agreeing that consultants are essential to the investment process, funds will likely continue to rely on external advisors.