Worries about pension funds’ abilities to meet their retirement payments have subsided since financial markets stabilized, giving managers time to re-think their investing strategies.
Their biggest future concerns? Protecting against downside risk and market volatility, according to a survey of defined benefit pension fund managers conducted by Pyramis Global Advisors, an arm of Fidelity Investments.
In Canada, these managers say their top three lessons learned are: adding downside protection, better matching of assets and liabilities and improving risk management.
That differs quite a bit from Pyramis’ 2008 released just before equity markets crashed, a time at which fund managers were simply watching growing volatility and had “a desire to understand it and monitor it,” Young Chin, Pyramis’ chief investment officer, said in an interview. Today, they are driven by “the urgency, the immediacy of trying to do everything possible to avoid another downdraft.”
Make no mistake: defined benefit pension funds that make guaranteed payments to beneficiaries aren’t in the clear. Currently in Canada they can cover 89.5 per cent of their required payments, down from 97.1 per cent in 2008. But the current level isn’t as dire as it was when markets were plummeting and the fund managers have some breathing room to re-work their portfolios.
In the coming months, 35 per cent of Canadian managers said they will put more emphasis on fixed-income products. Mr. Chin refers to this as liability-driven investing, in which the pension funds match their long-term liabilities with safe, long-term assets like 30-year Government of Canada bonds. In the past, he said, the funds focused on getting a maximum short-term return from equities, and that contributed to big shortfalls when equity markets nosedived.
Pension funds also expressed an interest in different assets classes such as private equity investments and real estate, which aren’t so market driven and can be held longer-term. They also plan on limiting their “home market bias.”
“People are more open than ever to expand beyond local borders,” Mr. Chin said.
Subtle differences exist between North American and Europeans fund managers. In North America, the survey found pension funds are focussed on downside protection while longer-term risk management dominates across the Atlantic. But Mr. Chin says their ideas overlap. “All plans are focused on the same things, just in different orders of priority.”
To get these results, Pyramis surveyed over 460 corporate and public pensions across North America and Europe.
