Defined benefit pensions’ futures are diverging, as many corporate sponsors are winding down their plans, while public sponsors are bolstering theirs to last over the long term, according a new report from asset manager BlackRock.
“Driven by demographic change and economic, financial, and political currents, the world’s defined benefit pension funds are traveling toward two very different futures,” said the report, which is based on a survey of 300 funds conducted by the Economist Intelligence Unit for BlackRock.
According to the report, nearly three out of four corporates funds say they are de-risking, which rises to four out of five in the US, and nine out of 10 in the UK. It also found that plans with at least $25 billion in assets under management are more than twice as likely to have a de-risking plan than pensions that have less than $10 billion in assets. And while approximately 90% of the non-corporate plans said they are open to new members, only about 10% of corporate plans said the same thing.
Slightly more than half of the de-risking corporate sponsors say their eventual goal is to get their plan to the point where it is self-sustaining. However, the report said that many CIOs point out that the potential appetite for risk transfer deals is far greater than the current capacity of insurers to accept them, and that demand for hedging instruments themselves may outstrip supply.
“To risk transfer even part of our £45 billion would be a significant undertaking,” said Ian McKinlay, CIO of Lloyds Banking Group’s pension plans, who was interviewed as part of the report. Nevertheless, Lloyd’s expects its pension plans to achieve self-sufficiency by 2034.
The report also found that non-corporate funds are relying more on private assets, such as private equity and credit, real estate, and infrastructure, and are enhancing their ability to invest in them. Almost all non-corporate survey participants hold some private assets, and for nearly 20% of them, private assets make up more than 10% of their portfolio. Nearly three quarters of non-corporate funds surveyed say they have improved risk analytics to facilitate investments in private assets, and more than half say they have added investment professionals to focus on such assets and support their pursuit of potential premiums for bearing illiquidity and complexity risk.
“The trend of rising allocations to private assets seen over the past five years is continuing,” said the report, “as pension funds and other investors seek diversification and potential premiums for bearing illiquidity and complexity risks.”
The BlackRock report also found that environmental, social, and governance (ESG) investing is gaining momentum, with the US catching up to Europe.
“Overall, 57% said they began applying ESG criteria to their investing in the last three years, with a higher proportion in the US (62%), suggesting more recent adoption compared to Europe,” said the report. “Looking ahead, 86% of respondents overall expect ESG criteria to play a bigger role in investing in the medium term.”
Despite moving in different directions, one thing both corporate and pubic pensions had in common was that both expect more hybrid approaches that combine defined benefit and defined contribution elements.
“Already used in many markets and now adopted by 20 US state plans, hybrids look likely to spread,” said the report. “Around three-quarters of global non-corporate DB plans expect to offer a DC plan to beneficiaries in the medium term. A slightly smaller proportion of corporate-plan respondents expect that over the medium term, their DC plans will be able to employ more of the strategies available to their DB plans.”