After a year of market extremes, Canadian, U.S., U.K. and European plan sponsors still have concerns about the global economy. And according to Pyramis Global Advisors’ Global Pension Pulse Poll of more than 420 corporate and public pension plans (with more than US$1 trillion in assets under management), the attitude of pension plans toward investing has changed as a result.
For many pension plans, inflation is a bigger threat than deflation. Concern is highest among U.S. plans (89%), followed by plans in Canada (74%) and Europe (69%). Interestingly, deflation is a big concern for plans in the Netherlands (40%) and those in Switzerland (32%). In Canada specifically, funding status is also a top concern for both corporate and public plans (42%), with risk management ranking second (20%).
Indeed, in all of the countries surveyed, plans are focusing on managing risk exposure, improving current funding status and looking for investment strategies to deal with continued market volatility.
But concerns about risk do not mean that plan sponsors are turning their backs on active management. Plans are looking for ways to return to equity markets after enduring losses in 2008. In fact, almost nine out of 10 Canadian plan sponsors believe that actively managed equity strategies will produce alpha in the future. That percentage is higher in Canada than in Europe (68%) or the U.S. (70%).
Furthermore, plan sponsors are broadening their equity allocations to include global equity strategies more frequently, with an emphasis on emerging market equities. Interest in emerging market equity is strongest in the Netherlands (50%) and the Nordic region (46%). Canadian and U.S. sponsors are also intrigued, with 30% and 25%, respectively, expressing interest.
Meanwhile, liability driven investing (LDI) continues to grow in the U.S. and Canada: 43% of both U.S. corporate plans and Canadian plans expect to increase long bond allocations, while 22% of U.S. corporate plans and 27% of Canadian plans are looking at greater allocations to corporate bonds.
When it comes to asset allocation trends, there’s a sharp divide across the Atlantic. The majority (57%) of U.S. corporate plans believe that there will be a strong emphasis on fixed income/LDI, as do 40% of Canadian plans. In contrast, only a few European plans (9%) are forecasting a big shift toward fixed income or LDI strategies over the next 10 years. This may be due to earlier adoption of LDI strategies in Europe as compared with North America.
In Europe, 32% of sponsors say they will definitely or likely use alternatives such as hedge funds, infrastructure or private equity in an attempt to limit volatility. Similarly, 50% of Canadian plans and 34% of U.S. public defined benefit plans are interested in alternatives. Equity market-neutral strategies are becoming increasingly popular in all three regions.
Other favoured single-strategy hedge funds are directional long/short, global macro and multi-strategy funds.
In other trends, 61% of U.S. public plans foresee a move toward global equities and bonds, while 35% of European plans agree that there will be a shift to global investing. Another 29% think pension allocations will focus more on absolute return and the use of alternatives.
Ultimately, the changes in attitudes revealed in the survey are a positive sign. While plan sponsors face considerable challenges, the survey indicates that they are meeting these challenges head on and are actively working to improve their future strategic position. BC
Young Chin is the chief investment officer at Pyramis Global Advisors.
pyramiscanada@fmr.com
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© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the March 2010 edition of BENEFITS CANADA magazine.