Global Outlook 2024 Report


Like this article?

Sign up to our free newsletter

Pension plans increase use of alternative investments

There has been a significant increase in the percentage of pension portfolios investing in alternatives when compared to the previous two years, a poll by SEI suggests.

In 2008, 51 per cent of pension executives surveyed said their pension portfolio was invested in alternatives. In 2009 the percentage increased to 53 per cent and this year’s poll saw an increase to 65 per cent.

Use among pensions with more than USD300m in assets is significantly higher than those with less: 84 per cent compared to 53 per cent respectively.

Other poll findings include that nearly all pension executives viewed improved funded status as a benchmark more important than increasing absolute returns.

Of the major concerns impacting pension executives, more poll respondents (88 per cent) chose managing funded status than any other issue.

Additional priorities moving forward included improving funded status, creating a long-term pension strategy, stress-testing the portfolio, increasing due diligence, and defining the role of consultants and investment professionals providing advice to pensions.

"Funding deficiencies are getting the attention of various stakeholders in companies and, as a result, boards and senior management are looking for long-term strategies as this scrutiny continues," says Jon Waite, director, investment management advice and chief actuary for SEI’s institutional group. "A plan’s funded status is the top priority as liabilities are being managed within a larger, organisational, risk management framework. In particular, alternative investments are being integrated into the portfolio as another channel for mitigating overall risk, while providing additional return."

In addition to the increase in the percentage of pensions using alternatives, poll respondents from larger plans are investing a greater percentage of the portfolio in alternatives. Of those with more than USD300m in assets, more than three-quarters (77 per cent) invest 11 per cent or more in alternatives. By comparison, 42 per cent of pensions with less than USD300m in assets invest 11 per cent or more.

Real estate (77 per cent), private equity (54 per cent), funds of hedge funds (47 per cent), and single manager hedge funds (30 per cent) are the most common alternatives being used, according to respondents.

In response to recent economic conditions and changing priorities, some pensions are closed to new entrants and accruals have ended for current participants. According to poll respondents, more than half (53 per cent) of the pension plans are either closed or frozen, approximately a ten per cent increase compared to a similar survey conducted in August 2009.

However, funding deficiency was not the only factor in preventing organisations from terminating their plan. Respondents were asked if their plan were fully funded, would they still look to terminate the plan as soon as possible. Of those that already have frozen their plan, nearly three-quarters (73 per cent) said they would look to terminate the plan. Of those with active plans, 75 per cent said they would not look to terminate it.

Like this article? Sign up to our free newsletter