Survey: Pensions Seek Alts on Volatility Concerns; Inconsistent Use of LDI

A new poll by SEI asserts that more pensions are using alternatives, with LDI strategies inconsistently used.

(August 25, 2011) — A new poll by SEI — completed by 106 pension executives overseeing assets ranging in size from $25 million to over $1 billion — has revealed that an increasing number of schemes are using alternatives as funded status volatility continues to be a primary concern.

More plans are using alternatives, but there has been a decrease in the number of pension plans allocating more than 10% of the portfolio to alternative asset classes. In addition, use of liability-driven investment (LDI) strategies is completely inconsistent – especially among the well funded plans – according to the firm.

“Alternative investments continue to be integrated into pension portfolios as another channel for mitigating risk, while providing additional return apparently. However, ongoing volatility of interest rates continues to put liability risk as a primary concern for plan sponsors,” said Jon Waite, Director, Investment Management Advice and Chief Actuary for SEI’s Institutional Group, in a statement. “The poll results show numerous inconsistencies in the use of various investment strategies, including alternatives, over the past year as plan sponsors appear to be uncertain of what’s most appropriate. This might also explain an increased interest in outsourcing as now, more than ever, plan sponsors need to maximize the benefits of external resources and the expertise they provide.”

This year, nearly eight out of ten (78%) of pension executives surveyed in the SEI Quick Poll reported their organization had some allocation to alternatives in the pension portfolio, compared to 51% in 2008, 53% in 2009, and 65% in 2010. However, while more plans in 2011 appear to be using alternative investments, allocations greater than 10% of the overall portfolio appear to have decreased in the past year. According to SEI’s findings, 77% of respondents with more than $300 million in pension assets allocated at least 10% of the portfolio to alternatives in 2010, compared to only 42% of pensions of the same size this year.

Meanwhile, the survey discovered widespread discrepancies in regards to liability-driven investing (LDI) strategies. A total of 57% of the respondents with pensions greater than 90% funded have no allocation whatsoever to LDI strategies. Of those from the group using LDI, 70% have at least 40% of the overall pension portfolio in LDI.

SEI’s findings compare with an April study of investment consultants in the US and Canada. Findings from Casey Quirk & Associates and eVestment Alliance’s annual survey revealed that alternatives, emerging markets, and liability-driven investment (LDI) strategies will dominate search activity this year. According to the survey, consultants expect the majority of searches to focus on hedge funds, reflecting the growing importance of the asset class for institutional investors. Additionally, the study shows that half of those surveyed expect an increase in institutional interest in inflation hedging strategies this year.

“One of the more interesting findings in this year’s consultant survey is the rising interest in private equity and real assets,” notes Casey Quirk Partner Yariv Itah in a statement. “Institutional investors increasingly manage toward outcomes rather than just excess return, and they want asset managers who can use illiquid investments to mitigate inflation risk and manage liabilities.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742