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Pension Funds Taking Active Approach

businessman and graphsPension funds are taking on a much more active, hands-on approach to managing their assets, says Rob Baillie, senior vice-president and head of State Street Canada.

That was one of the key findings in its ‘Pension Funds DIY’ global survey of pension fund executives. Several key themes were identified, but Baillie says the most significant is the “hands-on approach with respect to investment risk and a reassessment of their attitudes towards risk as they seek to deliver more value in what is still a very challenging marketplace.” This means they are open to taking on more risk in pursuit of the return threshold that they need to achieve.

Quite Small

Pension funds are also looking at alternatives and putting more assets in alternatives. “In the past, the allocations have been quite small and have not been sufficient enough to generate the required growth,” he says. So they are taking bigger bets on alternatives. For example, 60 per cent said that they plan on increasing their allocation to private equity and 45 per cent are planning to increase their investments in real estate. Those are the two main alternative vehicles that Canadian pension funds typically invest in. However, they are looking more seriously at hedge funds with one in four pension funds planning to invest in them for the first time.

This is likely due in part to the greater comfort that now exists with hedge funds. “Pensions and pension committees have historically avoided hedge funds because of their lack of transparency and high fees. Recent efforts to increase transparency have helped, despite the continued fee environment, because firms feel more confident they’re getting what they invest in.”

The other significant finding from the survey is that pension plans are looking seriously at bringing more asset management in-house. This should happen over the next three years, he says, and is being driven mainly by cost concerns. Of the respondents, 29 per cent indicated that it is a challenge for them to justify the fees they are paying to asset managers.

Dipping Their Toes

For the top public pension plans that have managed their assets in-house for a long time, “we are seeing a lot more interest in looking at particular asset classes, whether they be passive or money market, and dipping their toes in there. There are other pension plans that are very seriously pursuing bringing more of their assets in-house on a large-scale basis.”

The relationship between pension funds and asset managers is evolving as well with pension funds saying they need asset managers who can help develop investment strategies that are compatible with their broader investment philosophies, he says. For asset managers, this means rather than being a supplier to the pension fund, they are more like partners and are looking to align their success measures to those of the pension funds.

Another element identified in the survey is “fortifying governance” which is a critical aspect of pension management. It can be anything from regulatory governance to data management and is a significant focus, especially for any pension funds that manage their own money and have data in-house. Baillie says “it is no longer an option to pursue data management in a casual way. You need to be very strong in this area in order to manage the risk return profile of the pension fund and the underlying asset classes.”

While Baillie also sees an air of optimism among plan sponsors, it still remains a challenging marketplace. For example, the interest rate environment is one challenge, but “I think that is the new normal.”

Damage Done

As well, even in Canada, more and more assets are leaving the North American market in pursuit of emerging and even frontier markets. This means pension fund investors need to look at foreign exchange and the intrinsic value of holding the investment. “Foreign exchange policies and the decision on whether to hedge or not to hedge are very important. The last year has introduced volatility and some damage along with it. The big question being asked is ‘what side of the coin were you on when it all happened?’ I think there will always be some volatility in the foreign exchange marketplace, especially with the Canadian dollar. Where it levels off has yet to be determined, but it will continue to be a focus, that is for sure.”

Benefits and Pensions Monitor Staff

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