To mark our fifteenth anniversary, we asked 15 European pension funds about the past, present and future of pensions. Although eight respondents to this month’s Off The Record survey felt the trend would abate, all believed that increases in pension members’ longevity would continue in the 2010s and 2020s. Only two felt their fund was badly prepared to deal with this. A Dutch fund commented: “We already calculate a future increasing life expectancy, and I think it will be less than our calculations.”
Changing demographics means changing membership profiles - but not necessarily predictable changes. Respondents were split equally in noting a growth in actives, deferreds or pensioners in their scheme, for example. A UK scheme that has more deferred members said: “This is to be expected as the plan gets older, as legislation now requires many more short-service members to retain benefits in the fund or transfer them elsewhere, and transfers are now quite unusual.”
Over three-quarters of respondents stated that members, whether active, deferred or pensioner, had become more interested in their pension since the end of the 1990s, although less than half of respondents felt members had become more knowledgeable about their pension in the same time period.
Nine believed simplicity should be at the heart of a pension fund’s investment strategy. “[It] is important to let members know where their money goes,” said an Italian fund. A UK fund put it bluntly: “If you don’t fully understand it, don’t buy it.”
However, four respondents felt it was unrealistic for a pension fund’s investment strategy to be uncomplicated. “The world and the financial environment are complex, [so] you can’t expect to be successful with a simple investment process,” stated a Dutch fund.
Reality seemed to support the minority in this case. Every fund had diversified its geographic investment exposure in the past 10 years, whether “somewhat” or “significantly”, and more than half stated they would increase geographic diversification further. A Spanish fund plans to “differentiate between emerged and emerging markets, [and through the] introduction of frontier markets”. Similarly, two-thirds of respondents had significantly increased asset class diversification in the last 10 years, and only one had not diversified at all. Thirteen planned to increase asset class diversification in the future.
Respondents listed asset classes such as emerging market bonds, corporate bonds, tactical asset allocation and private equity as among the most successful additions to the mix over the past 10 years. However, a Dutch fund picked out “[the] liability cash flow matching strategy, in combination with a substantial reduction of equity and significant diversification”, and over half of respondents said their pension fund used LDI. All had implemented LDI since 2006, with the most recent having done so this year, and while some gave various reasons (such as protection of funded status), four had been persuaded to do so by mark-to-market accounting.
Respondents were split as to the effect of mark-to-market accounting for pension liabilities, believing it to have been generally negative for pension fund sponsors, shareholders and pension fund members. One Dutch fund said: “Mark-to-market accounting has led to a lot of unnecessary volatility, anxiety and uncertainty.” But a compatriot noted: “Though pension funds suffer from the change, it results in [a] more realistic approach to ALM, requires significantly higher skills of the pension fund staff and creates more transparency.”