De-Risking Drive Leads to Alternatives and Real Assets Push

Research from Clear Path Analysis has found US final salary funds are racing towards buyouts.

(March 31, 2014) — Almost a third of US defined benefit (DB) pension funds are considering or are very likely to carry out a pension risk transfer transaction this year, according to a survey from Clear Path Analysis.

The survey, which was partnered by Prudential and questioned more than 60 North American pension plan managers and pensions sponsor representatives, found US funds’ attitudes towards pension risk transfers had turned markedly positive during the past three years.

And the decision to de-risk had led corporate pension funds to invest more in real assets, while underfunded public sector plans turned to alternatives to fill the deficit.

Unlike the UK pension fund industry, which has seen a high number of pension risk transfers since the onset of the financial crisis, the US industry was historically been more cautious on de-risking.

In 2010, a Mercer survey of US defined benefit plan sponsors 2010 had found that 41% of US pension respondents would adopt a wait-and-see approach on changes to reduce their risk.

However, Clear Path Analysis report’s findings suggested that attitudes have changed, and that risk transfer has become more of a priority for US pension funds in the year ahead.

“We’re seeing companies look at ways of efficient risk reduction and transfer of liabilities as they consider their stock price and corporate cash flow,” said Glenn O’Brien, head of US Distribution for pension risk transfer at Prudential Financial.

“Plan sponsors are starting to realise that de-risking can be less expensive than keeping the liabilities on their balance sheets and transferring pension risk allows companies to focus on the day to day running of the business.”

The move towards buyouts had also impacted on pension funds’ asset allocations: Clear Path Analysis found corporate plans were shifting into real assets.

Elsewhere in the report, 71% of public sector plans said they planned to look at alternative assets in an effort to meet sponsor goals.

Dan Tremblay, director of institutional fixed income solutions at survey sponsor Pyramis, outlined what he saw as the likely shift in asset allocation over the next five years.

“While we’ve seen a closed plan switch to fixed income, open plans are very much looking to alternatives as results for this survey clearly indicate,” he said.

“Schemes are taking the impact of increased longevity on their liabilities more seriously and are considering buyout solutions, and improving returns through a switch to alternatives.”

The full Clear Path Analysis report can be found here.

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