A growing number of U.S. defined benefit pension managers are looking beyond stocks and bonds and investing in so-called alternative investments—including commodities, real estate trusts and hedge funds—according to a survey by SEI, an investment management firm.
The August 2011 poll was completed by 106 U.S. pension executives overseeing assets ranging in size from $25 million to over $1 billion. Of the respondents, 49 percent oversee more than $300 million in assets. None of the respondents is an institutional client of SEI.
Nearly eight out of 10 (78 percent) of the surveyed pension executives reported that their organization had some allocation to alternatives in the pension portfolio, compared to 51 percent in 2008, 53 percent in 2009 and 65 percent in 2010. However, while more plans in 2011 appear to be using alternative investments, allocations greater than 10 percent of the overall portfolio appear to have decreased. In 2010, 77 percent of respondents with more than $300 million in pension assets allocated at least 10 percent of the portfolio to alternatives vs. only 42 percent of pensions of the same size in 2011.
Of the executives surveyed, nearly half (46 percent) said the plan’s funded status was 90 percent or better. When asked about the direction of pension plans, more than half (52 percent) of those polled said that even if the pension were funded fully they would not look to terminate the plan.
The results indicate a correlation between well-funded plans and the long-term strategy of the plan, according to SEI. Of those executives with fully funded plans, more than three-quarters (76 percent) reported they would not terminate the plan if they could, compared to the 65 percent of executives whose plans were less than 80 percent funded who said they would terminate immediately if they could.
65% of executives whose plans were
less than 80 percent funded said they
would terminate immediately
if they could.
The poll found wide discrepancies in regard to use of liability-driven investing (LDI) strategies, which seek to reduce pension funding volatility by aligning investments more closely with plan liabilities in the form of future payments to retirees. Typically, LDI emphasizes the use of long-duration bonds, liability hedges and asset diversification while lowering exposure to equities.
Notably, more than half (57 percent) of the respondents with pensions that are more than 90 percent funded have no allocation to LDI strategies. Of those from the group using LDI, 70 percent have at least 40 percent of the overall pension portfolio in LDI strategies.
“Alternative investments continue to be integrated into pension portfolios as another channel for mitigating risk while apparently providing additional return. However, ongoing volatility of interest rates continues to put liability risk as a primary concern for plan sponsors,” said Jon Waite, director of investment management advice and chief actuary for SEI’s institutional group. “The poll results show numerous inconsistencies in the use of various investment strategies, including alternatives, over the past year as plan sponsors appear to be uncertain of what’s most appropriate. This might also explain an increased interest in outsourcing as now, more than ever, plan sponsors need to maximize the benefits of external resources and the expertise they provide.”
Investment Management Outsourcing
In regard to the trend toward an outsourced approach, nearly half of participants (47 percent) said their organization will evaluate an outsourced approach to investment management when they next make a change. Of those organizations open to evaluating outsourcing, 43 percent said they plan to issue a request for proposal for these services by the end of 2013. Larger plans expressed a significant interest—of the plans with more than $300 million in assets, 41 percent said they would evaluate an outsourced model.
Pension Volatility: How to React as Funding Forecasts Spike, SHRM Online Benefits Discipline, November 2010
Pension Tension: Seven Critical Questions Facing Plan Sponsors, SHRM Online Benefits Discipline, August 2009
Liability-Driven Investing Strategies Proved Worth, SHRM Online Benefits Discipline, February 2009
'Alternative' Investments Require Heightened Governance, SHRM Online Benefits Discipline, February 2007
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