Irish Pensions Magazine Spring 2014
12
Analysis
Advertorial
W
ith the June 2013 Funding Proposal deadline now
well behind us, many schemes will be turning
their attention to investment strategy. Investment risk,
as we know, is one of the key risks for defined benefit
pension schemes. But in the wake of the financial
crisis and the recent changes to the funding regime,
what are the opportunities and risks for trustees and
companies, and how can they get the most from their
investment strategy in the years to come?
In this article, we take a short look at the key findings
of our recent Pensions Risk Survey, and at some of the
investment challenges which lie ahead. We will look at
issues such as diversification, the hedging of scheme
liabilities, and at some recent developments in the
investment governance space.
Scheme asset allocation
The split between return-seeking and matching
assets is a main driver in the level of investment risk
being taken. Through our survey, we were keen to
understand both the level of risk currently being taken
by schemes, and the attitude to risk of those making
the decisions.
As far as attitudes go, our survey respondents rated
“matching liabilities to reduce volatility” as their
number one driver in setting investment strategy. So,
awareness of the need to de-risk is clearly high. The
introduction of the Funding Risk Reserve has no doubt
increased this awareness, with around 75% of schemes
carrying out a review of their investment policies in
light of the new requirements.
However, our survey also shows that return-seeking
assets are still playing a major role in pension
scheme investment strategies (see table), with the
average scheme holding 47% of assets in its growth
portfolio. Younger schemes, with longer investment
time horizons, held an average of 50% in the growth
portfolio, whilst mature schemes held on average 43%.
Small schemes, with fund sizes up to €25 million, held
an even higher average of 58%.
With schemes still open to significant volatility, it is clear
that more can be done to reduce the level of investment
risk being taken. But getting the right balance between
reducing risk and capturing returns is difficult, especially
in these times of underfunded schemes. So how are
schemes looking to capture their targeted level of
returns?
Make-up of the growth portfolio
With funding deficits still pervasive, it is the growth
portfolio which is likely to be doing the “heavy lifting”
for some time to come. With this challenge in mind, we
are left with the question of what asset classes schemes
are looking to for growth, and whether these growth
portfolios are in a position to deliver the expected levels
of outperformance.
Our survey asked respondents to detail the proportion
of the scheme’s growth portfolio invested in equities
alone. The average scheme held around 83% of
its growth portfolio in equities, demonstrating that
concentration of investments exists within typically
return-seeking portfolios. The average also varied with
scheme size, with the smallest schemes holding around
92% of growth assets in equities, and the very large
schemes holding on average 76%.
Investment strategy: Grasping the nettle
0%
20%
40%
60%
80%
100%
0% to
10%
10% to
20%
20% to
30%
30% to
40%
40% to
50%
50% to
60%
60% to
70%
70% to
80%
80% to
90%
90% to
100%
% growth assets in equities
% in return-seeking assets
% equities % other growth
% return-seeking
Average
Young
50%
Ageing
46%
Mature
43%
Table 1: Average asset allocation by scheme maturity
Figure 1: Proportion of growth assets held in equities
by Christopher Bown
