The vast majority (92%) of pension funds are planning to upgrade their governance model over the next 12 months, according to new research by State Street Corporation.
Its Pensions with Purpose: Meeting the Retirement Challenge report, which is based on responses from 400 pension professionals in 20 countries, found that respondents believe their board’s expertise is not strong enough in critical areas and must be improved, with 45% planning to increase training and education opportunities for board members.
About a third (32%) of respondents rate their board’s ability to think beyond short-term issues to address longer-term, strategic factors affecting their portfolio as “very strong.”
Just 36% rate their board’s understanding of the risks facing the retirement fund as “very strong,” while 38% believe their board has a high level of general investment literacy.
“As a result of the difficult economic environment and shifting demographics, the most innovative pension funds are proceeding with confidence in tackling the retirement challenge,” said Martin J. Sullivan, head of asset owner sector solutions for North America at State Street.
“While there’s no single strategy that will solve the challenges for the entire industry, leading pension funds are employing stronger governance frameworks, more advanced risk management capabilities and a more diverse and specialized talent pool to meet long-term objectives.”
The research also found that funds will continue to diversify their investment strategies, with 83% expressing moderate or high interest in environmental, social and governance (ESG) investments.
Of those interested in ESG, 80% of respondents in North America and 78% of respondents in EMEA said they are more likely to appoint a manager with ESG capabilities.
Alternatives are also seen as key to boosting returns, with hedge funds and real estate emerging as the favourites – 51% and 50% of respondents are planning to increase investments, respectively. Yet 46% said they lack transparency on the risks stemming from alternatives.
The research also found that nearly two-thirds of pension funds feel pressure to reduce costs and 80% plan to merge retirement plans to boost efficiency and oversight. The benefits for consolidation that were cited included: reduced costs (24%), improved operational effectiveness (22%), and high standards and consistency of governance (18%).
The appetite for risk was split down the middle, with 36% of respondents saying they are ready to take on more risk, while 45% are actively looking for ways to decrease the amount of risk in their portfolios. Just 20% of funds rated themselves as highly effective at managing key risk areas, including investment and liquidity risk.
The pension funds surveyed are ramping up their internal specialist talent, with nearly half planning to increase their internal risk teams (48%) and investment teams (45%) over the next three years, particularly as they gear up for increased ESG investing.
However, funds will remain reliant on external partners with 65% of all funds agreeing that their consultants are essential to guiding their investment process.
“As life expectancies around the world continue to rise dramatically, there is increased strain on retirement infrastructure,” said Rob Baillie, head of State Street Canada. “The ultimate mission of the global pension industry is to deliver the best outcomes for savers over the long term.
“Although that mission is getting harder, our research shows that pension funds recognize the need to pursue fresh strategies and are focused on renewing their purpose of owning the future of retirement.”