Pension funds to transform governance for speedy end to deficits – report

Some 92% of pension funds internationally are planning to make at least one major change to their governance models, with many expecting their action to help them get rid of their deficits more quickly than others, according to new research.

State Street Corporation said its poll of 400 pension staff in 20 countries also showed that 68% of the funds they work for are planning to make at least three changes to governance.

Many of the improvements they are looking to make involve the transparency and frequency of reporting and giving out information, it said.

State Street said 41% of respondents planned to increase the detail or frequency of their reporting to the board in 2016, while about the same proportion aimed to be more transparent to their members about the fund’s governance and investment performance.

State Street said these moves came against the background of increasing overall scrutiny of pension funds in an operating environment that was more complex. 

Pension funds taking a “more advanced approach to governance” expect to eliminate their deficits more quickly than the rest of the industry, it said.

They will also increase their exposure to alternatives, it said, adding that six out of 10 of this group of pension funds think they will put more into hedge fund strategies over the next year, compared with 34% of all respondents.

State Street said these governance changes would happen at the same time as plans to cut costs and diversify portfolios. 

As an example, it said 80% planned to merge assets and liabilities from multiple pension plans.

Respondents cited cost cuts and more effective operation as two key benefits of this consolidation.

Ian Hamilton, managing director for Asset Owner Solutions at State Street, said consolidation was set to increase, with economies of scale the most obvious hoped-for gains but other motivations also in play, such as risk management and an eagerness to leverage in-house talent. 

He also said larger schemes were bringing more and more expertise in-house and that this trend was set to continue, although it would not be limited to big schemes.

The research showed that only 38% of respondents considered the general investment literacy of their governing fiduciaries was very strong, while only 36% rated their ability to understand the risks their pension funds were facing as very strong, State Street said.