The first Global Pensions Survey (GPS) got off to a good start in February in the first phase of its launch, with a total of 78 European pension fund respondents from 16 countries in the initial round.
GPS finds investors in a relatively optimistic mood, with 53% more optimistic about their country's economy compared to the previous quarter. They were more evenly split when it came to the ability of their pension fund to meet its current financial objectives compared to the previous quarter. Here, 44% were more optimistic, but 41% felt no change and 15% were less optimistic.
Respondents on average expected a 1.05 percentage point improvement in total 12-month investment returns relative to the previous year, with an estimated increase in equity allocations of 4.81 percentage points and an increase in fixed income of 4.36 points.
Concerns remain, however, with 56% of funds citing interest rate risks among their top three external concerns, and over a third (35%) citing it as their main concern. Some 51% of respondents rated the stability of the financial system among their top three concerns. A total of 44% named market volatility and 32% cited domestic regulation among those worries. Longevity risk was among the top three concerns for 40%, and inflation risk was named by 38% of respondents.
Performance of asset managers, the international regulatory framework and counterparty risk scored low in terms of external concerns. More larger funds on average were worried about the stability of the financial system, market volatility, interest rate risk and inflation risk than their smaller counterparts.
When it came to the top internal issues, no fewer than one-third (33%) of respondents cited cover ratio or solvency concerns as their top concern, with a total of 63% placing it in the top three. Almost two-thirds (65%) placed their ability to manage risks, such as interest rate risk, among their top three concerns. More than half (53%) of the sample said their ability to maintain a focus on long-term investing was one of their top three concerns, and 29% also said board or trustee competence was a top three concern.
Worries about ability to manage risks were fairly evenly spread between different sizes of fund, but more smaller funds were concerned about their board or trustees' level of competence.
When it came to funds' key focus for the coming 12 months, respondents were asked to distribute 100 points among a list of choices. A focus on ALM achieved the highest mean weighting (29 points), followed by tactical and medium term asset allocation (27) and a significant shift in strategic asset allocation (26). This was followed by change in benefit structure (23). Optimisation of risk budget through asset diversification (22) and risk reduction (22) scored joint fifth place on this basis.
Some 64% of respondents saw increasing relevance for liability hedging, and 55% agreed that increased life expectancy is a threat to pension funds. A total of 46% agreed that pension funds would have to rethink diversification 45% agreed that pension funds would have to reckon with more frequent financial shocks in future.
Turning to corporate governance, the key focus for the first report, respondents were not unanimous on the question as to whether pension funds are acting as responsibly as they should as corporate shareholders: 41% agreed and 49% disagreed, with 10% in the ‘no' camp. A total of 56% of respondents agreed that pension funds in general must do more to hold the corporate sector to account, and the same number agreed that the asset management community in general does too little on this issue. A total of 54% agreed that institutional investors collectively could help avoid excessive risk taking at financial institutions in future.
More than half (53%) of respondents already had a corporate governance or shareholder voting policy in place and 10% planned to put a policy in place in the coming 12 months.
The bulk of the respondents (44%) were from pension funds with assets above €1bn and 56% with assets below €1bn. The average asset allocation of participants was 51% fixed income, 31% equities, 7% real estate, 5% alternatives and 6% cash and other. The average investment return for 2009 was 12%.
The Global Pensions Survey will poll pension funds quarterly and is a collaboration between Tilburg University, IPE and the European Pension Academy. To register for participation or to see the full results please visit www.globalpensionsurvey.com