Lessons learned during the financial crisis are influencing views on investment risk and defined benefit (DB) pension plans going forward. That was the message at a recent luncheon event in Toronto where Pyramis Global Advisors revealed some key results from its 2010 Defined Benefit Research Study.
The 2010 survey polled chief investment officers, treasurers and executive directors at 466 corporate and public pensions in 13 countries, representing more than USD$2 trillion in cumulative assets.
One of the key findings from the survey is that in the wake of the financial crisis and gradual recovery, many pension plans are realizing the need to improve their risk management practices and understanding of how they view volatility.
According to the data, average funding status of DB plans in Canada fell from 103% in 2008 to 95% in 2010. U.S. corporate plans saw a drop from 106% to 91% between 2008 and 2010, while U.S. public plans went from 88% funded to 82%
When asked about the top lessons they took from the financial crisis, a majority of respondents in Canada (58%), U.S. public plans (58%) and U.S. corporate plans (55%) said their risk management needs improvement. In Europe, 46% of respondents echoed that sentiment.
“Back in ’06 and ’07, when plans were doing quite well from the asset side, risk really wasn’t first and foremost on plan sponsors’ minds,” Pyramis senior vice-president, global investment strategies, Peter Walsh told attendees. “Then we had… a number of events, after which the markets really crashed. I can remember looking at my Bloomberg screen during the Lehman period, really wondering ‘Is this the end? Where are we going?’”
Another key lesson learned was the need for greater downside protection, indicated by 91% of U.S. public plans, followed by 68% in Canada, 65% of U.S. corporate, and 34% in Europe. Both U.S. corporate (70%) and Canadian (67%) plans strongly suggested they need to better manage their assets and liabilities; 34% of U.S. public and 22% of European plan respondents agreed with this statement.
“What happened over the last couple of years is that people didn’t really realize what they owned and why they owned it,” said Walsh in analyzing the data. “They thought that just because it was a diversification effect, it was going to be a positive. And as we all saw, that didn’t work.”
Plan managers surveyed indicated they expect to reduce their domestic equity, with U.S. corporate plans indicating an average domestic equity reduction of 50% and Canadian plans reducing by 46%; expected domestic reduction levels in U.S. public plans are 38% and 21% in Europe. Plan respondents also indicate an interest in alternatives, with 48% in Canada and U.S. public plans considering real estate and property investments, and U.S. public plans also indicating a strong preference for commodities, at 42%. Hedge funds are the most popular alternative in Europe, with 37% of respondents expressing an interest.
When asked about what trends would prevail for DB funds a decade from now, few indicated they believe the traditional asset mix will still prevail. Instead, many in U.S. corporate (54%) and Canadian plans see a significant shift towards fixed income and/or immunized strategies. And a majority of respondents from U.S. public plans believe allocations, both fixed income and equity, will become more global; this was also the most popular believe among European respondents, at 29%.