German pension investors can hit desired return targets by rebalancing allocations and boosting the risk-return profile of their investments through “broader diversification”, according to Tobias Bockholt, senior investment consultant at Willis Towers Watson (WTW).

The consultancy’s latest survey, Pension Risk and Investment of Pension Assets 2020, showed that drivers for increased returns included secure income assets and private markets investments.

WTW surveyed 40 institutional investors including foundations, contractual trust arrangements (CTAs), Pensionskassen, Pensionsfonds and Versorgungswerke with total assets under management of €163bn.

It found a disconnect between the expectations for returns and realistic goals. The vast majority (96%) of pension investors expected to achieve their targeted returns in the next five to 10 years.

With the current structure of portfolios, however, unregulated investors such as CTAs can expect median returns of only 2.3%, and regulated investors, including Pensionskassen and Pensionsfonds, of only 1.8%. The targets are higher, in the range of 2-5%.

Nigel Cresswell, head of investments Deutschland at WTW, said that “a closer look at current portfolios and markets shows that the assessment [of pension investors] is more optimistic than realistic.”

The pandemic and low interest rate environments will likely exacerbate pressure on returns, WTW added.

The firm has outlined a “Best Ideas Portfolio”, based on a rebalanced portfolio, with different sets of allocations and strategies that lead to a 2.4% return for regulated investors and 2.9% for unregulated investors.

Rebalance underway

According to the survey, allocations to bonds have significantly decreased in recent years, being rebalanced by equities, alternatives and real estate.

Investors’ risk profiles increased by 3.7% for unregulated and 3% for regulated investors.

This represents a shift for German pension investors that have always had a high exposure to bonds and lower to real estate and alternatives, compared to international peers.

Pension investors are likely to rely more on illiquid investments and private equity as volatility will continue, Bockholt said.

He warned that “reasonable alternative strategies in niche [segments] are more complex, require a higher level of governance and much deeper knowledge,” to leverage the full potential for returns.

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