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Survey: the investment attitudes of Irish pension fund managers, including their views on hedge funds Back  
Hedge funds are becoming an increasingly popular allocation for pension funds but a recent survey has revealed that the main barriers to investing in alternatives is a lack of knowledge, followed by client size and lack of resources, Tom Geraghty writes.
As part of its recent annual investment conference, Mercer Investment Consulting carried out and collated an extensive review of Irish pension plans’ attitudes to investment matters. It analyses trustees’ and plan sponsors’ attitudes to investment risks and objectives that are driving their investment decisions; their attitudes to the investment managers; and also their willingness to invest in alternative asset classes. Over 250 delegates participated in the survey and the key findings are as follows:

• Approximately 80 per cent of respondents fail to meet minimum funding solvency requirements. With assets under-performing and liabilities rising faster than expected, this double blow has left the majority of pension funds in a precarious funding position, with many now embarking on a series of funding proposals to the Pensions Board.

• The key objectives of defined benefit (DB) trustees and plan sponsors continue to remain long term in nature. Despite the concentration of regulators and the accounting profession on short-term metrics, only a minority of trustees and employers believe issues such as the minimum solvency standard and FRS17 should constitute their primary objectives. This is somewhat refreshing as it indicates that trustees and employers still take into consideration the long-term nature of pension plan investment and are not implementing short-term investment strategies, which could potentially have an adverse impact on a plan’s financial standing.

• Defined Contribution (DC) Trustees and plan sponsors believe that current contribution levels are inadequate to provide members with a sufficient standard of living on retirement. While the majority of respondents believe that contribution levels should be in excess of 20 per cent, the reality is that the average contribution level amongst Irish DC schemes is 10 pper cent. We believe that education and communication around the issues of contribution adequacy and the appropriateness of individual member investment strategies will continue to be important challenges for DC trustees and sponsors going forward.

• A significant number of respondents believe that employing specialist investment managers will solve their funding issues. When asked what course of action they would take to secure / improve a plan’s solvency position, approximately 20 per cent of respondents felt that employing specialist managers would be the key to success. Historically, investment managers (specialist or otherwise) have accounted for only 10 per cent of the actual investment return and risk level achieved by pension plans. Therefore, whilst better investment management might help the cause, their impact is likely to be much less significant than restructuring the investment strategy of the fund ,i.e., changing the mix of equities and bonds. While Mercer fully supports the move to specialist investment management, it is important to put it into context. Specialist management might make things slightly better but this action alone won’t solve the funding problem.

• The level of specialist management among Irish pension plans is still low. Only eight per cent of respondents had 80 per cent to 100 per cent of their assets managed by specialist managers. Despite much publicity of late, the traditional active balanced approach is still the pervasive model amongstt Irish institutional investors. These statistics are based on the number of respondents rather than by asset size. We believe that if the statistics were reported according to asset size that we would see much higher figures. This reflects the fact that a greater percentage of larger funds employ specialist managers and we believe that this trend will continue to filter its way to the small / medium end of the market.

• Eighty-seven per cent of respondents believe investment managers ‘hug’ benchmarks. This statistic obviously reflects the disillusionment of trustees and employers with the investment management community. Such attitudes may also help explain the growth in passive management in the Irish market over the last number of years. Clearly both trustees and indeed plan sponsors need to understand the investment approach and philosophy undertaken by their investment managers. This understanding will equip them with an appreciation of whether benchmark ‘hugging’, or indeed deviation from the benchmark, should be expected as well as the ability to assess whether their manager is delivering what they have been hired to deliver.

• The most popular area of alternative investments are hedge funds and corporate bonds. Approximately 55 per cent of respondents believe that the major barrier to increasing their allocation to alternatives is a lack of knowledge in this area. We believe that much needs to be done in this area in terms of education for trustees andd sponsors as well as the provision of ‘institutional friendly’ products for pension funds.

Key statistics:
Figure 1, close to 59 per cent of participants represented DB plans while 22 per cent represented DC pension plans. Over a quarter (25.4 per cent) of respondents represented both DB & DC while 2.9 per cent represented charities and investment trusts. 56 per cent of delegates attending act as trustees of their respective plans, 29 per cent act as plan sponsors while over 14 per cent act in a dual capacity as both trustee and sponsor.

Figure 2, Solvency Funded Status, shows the funded status of DB delegates surveyed on a minimum solvency basis. It shows that due to the equity market turmoil for the three years 2000 to 2002, the majority of Irish DB pension plans are in a precarious funding position with many now embarking on a series of funding proposals to the Pensions Board. This is despite a welcome recovery in the equity markets throughout 2003.

One of the primary goals of the survey was to gauge the attitudes of DB and DC trustees & sponsors to the important consideration of key risks and objectives driving their respective investment decisions. The charts below expand on this issue for both DB and DC clients.
Figure 3 shows that over 44 per cent of DB respondents rated meeting pension obligations as their primary objective. Approximately 30 per cent have a primary objective of improving the plan’s financial position. Interestingly only 5.6 per cent believe that outperforming a peer group is important despite the fact that the primary benchmark in place for the majority of clients is a peer group benchmark. Also, despite the proliferation of coverage in relation to shorter term issues like FRS17 stability and minimum funding solvency requirements, only a very small subset of trustees and employers chose these as primary objectives.

Figure 9 shows client attitudes to alternative investments and the various segments of this asset class. Asked if they were to increase their allocation to alternatives which form of alternative would they allocate to, close to 30 per cent of respondents indicated both hedge funds and indeed corporate bonds. Of the respondents 23.1 per cent choose small capitalisation equities with only 10.2 per cent indicating venture capital.

Asked what were the main barriers to increasing allocations to alternatives, figure 10 shows that close to 55 per cent of clients believed that lack of knowledge in this area was a primary barrier while over 30 per cent indicated that client size and lack of resources were the main obstacles in allocating to this asset class.

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