Market turmoil leads to less appetite for risk by pension funds, State Street global survey finds

For those employees with a defined benefit type of pension, the ride ahead looks enjoyable; for all those having a defined contribution plan the ride will be less enjoyable while those without a pension plan, start saving.

Those differences derive from the type of pension funds being offered by employers, and also the difficult challenge for that investment managers to create the benefits that have been promised.

“Pension funds are very much focused on their investment mix and changing that mix to isolate (themselves) from a few of the volatility that we have seen in the global stock markets,” said Rob Baillie, head of State Street Canada, when referring to a vital conclusion emerging from the annual survey of pension funds conducted by its Boston-based parent.

“The funds are diversifying a few of the risk away and to try and generate returns that are hopefully stronger and never correlated towards the global markets,” added Baillie, noting greater exposure to alternative investments is one approach.

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Alternatives really are a mixed bag and can include fund of funds hedge funds; real estate; private equity finance and infrastructure. About half the respondents within this year’s survey said they intend to increase their contact with those asset groups.

To reach its conclusions, State Street surveyed 400 funds (including about 40 from Canada) from 20 countries – 4 times the amount it surveyed the previous year – and followed up with interviews with 43 industry experts from 13 countries. The funds ranged from $500 million (six percent of the total) to a lot more than $10 billion (22 per cent.)



And the funds being surveyed have to make investment decisions against experience of tough economic fundamentals: an aging population means more retirees relative to contributing members; low interest mean liabilities compound at a faster rate than otherwise while volatile equity markets result in the task of achieving returns all the more difficult. However the managers’ job remains the same: reach a funding level to 100 percent and thereby ensure they can deliver on the pension promises.

In this kind of environment, the money is split on the degree of risk to visualize. The survey indicated about 50 % the funds want to assume more risk included in an agenda to improve returns so that they can narrow the so-called funding shortfall. The other half indicated they weren’t interested in taking on more risk.

In contrast, twelve months earlier, State Street’s survey showed 77 per cent of funds were keen to visualize more risk next 3 years.

“The [short term] global volatility makes it challenging for pension funds to handle for the long term,” noted Baillie, in explaining the big reduction in risk appetite. The appeal of alternative assets is yet another reason. “Infrastructure is perceived as being less risky and less correlated towards the global markets,” noted Baillie.

Some Canadian pension funds have opted to take risk, either investment or longevity, completely out of the picture by purchasing annuities. Baillie noted some Canadian pension funds discussed pooling assets with another fund to achieve economies of scale or a mixture of expertise “to better position these to cope with the headwinds.”

But the survey indicated at least two negatives in the heightened focus on alternative assets: the funds don’t have the necessary transparency to manage the danger; plus they don’t have the required expertise in the board level.

bcritchley@nationalpost.com