Pension funds are facing a new reality leading to the challenge of designing investment portfolios, which look nothing like the previously known ’equity/bonds/alternatives’ mix.

Speaking at the first IPE DACH Institutional Week forum, Christian Boehm, chief executive officer of Austria’s APK Pensionskasse, said that portfolio construction for occupational pension schemes will “become more complex”.

The complexity of a portfolio would lead “to building an alternative to a classic bond portfolio and at the same time to matching certain return expectations,“ he said.

For pension funds it is likely inevitable to increase their allocation to equities, he noted, adding that the challenge is to keep volatility risks “under control”.

Pension funds should therefore put forward a strategy to communicate to beneficiaries that return expectations fulfilled in the past are not “realistic in the current environment”, and they have to accept higher volatility compared to the past – in a pre-COVID time – to achieve in the long term a better risk-return correlation, he continued.

Pension schemes are looking for returns by diversifying their portfolios with alternatives to fixed income by investing in assets such as infrastructure, private debt, high-yield and emerging markets, which can bring returns in the long term.

Zero or negative interest rates have, as a consequence, “massive duration risk” in fixed income portfolios, Boehm said. New asset classes, however, force pension funds to face “special risks”.

He said: “We have to be aware that [we need] additional expertise in house.”

Long-term investors as pension funds have the “highest interest” in investing in companies meeting sustainability requirements, but “nobody wants to invest in stranded assets”, he said, adding that pension investors may still look at companies using technology necessary for the transition to sustainability but that are not there yet.


Also during this week’s forum, Oliver Polster, executive board member at HVB Trust Pensionsfonds, told the virtual audence that HVB had readjusted its asset allocation strategic goals in order to reduce funding volatility as it aims to achieve a performance above the discount rate over time.

The fund, whose funded pension obligations stood at €5.9bn for 2020, has found a compromise by allocating 60% of its assets in an assets and liabilities portfolio and 40% in a return seeking pot, he said.

The “brutal volatility” of last year led HVB to increase its allocation to equities from 4% to the current 12%, he added. HVB started a tender process last year to increase its allocation to private markets and COVID-19 has massively accelerated the exercise to meet managers to put a plan in place, Polster disclosed.

The bonds quota at HVB will also be reduced while looking ahead at possible investments in real assets, private equity, private debt and real estate as they are becoming more interesting, he said.

HVB is looking to increase its private market investments to 17%, with private equity making up approximately half of the allocation within illiquid assets, Polster explained.

The fund also plans to build up infrastructure and private debt investments with a focus on Europe and it has “already made the first commitment”, he said, adding that there is the possibility to up investments in sustainable assets too.

HVB’s real estate allocation – 14% – is exclusive to Germany, Polster said. “The corona [virus] crisis has shown how robust real estate is as an asset class”, he added.

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