Pension fund managers rethink investing model

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Most of the world's pension fund managers are rethinking the traditional way pension money has been managed as many now concede they are unlikely to meet their return targets over the next five years.

A global survey of pension managers by Pyramis Global Advisors, the pension asset management division of financial giant Fidelity Investments, suggests a fundamental shift is under way in the pension sector.

Fifty-two per cent of fund managers said they are rethinking the traditional investing model, which for decades has seen pension funds typically put 60 per cent of their assets in stocks and 40 per cent in bonds.

Instead, they are searching for investment strategies that will manage risk differently or earn better returns in a low interest-rate environment.

Canadian funds in particular are making a shift, with 79 per cent reporting that they are rethinking old investing models, compared with 37 per cent in the United States and 67 per cent in Europe.

Derek Young, president of Fidelity's global asset allocation division, said Canada's huge public-sector funds account for the especially high proportion of Canadian funds changing their investment models.

"The public plans in Canada are more sophisticated than any other public plans in the world," he said.

Pyramis surveyed 632 pension funds in 16 countries that oversee $5-trillion (U.S.) in assets, representing 20 per cent of the world's pension assets.

In Canada, 92 pension plans participated, managing 25 per cent of the country's total pension assets.

The survey found that Canadian funds have an average target for long-term returns of 6 per cent annually on their total assets, while U.S. funds are targeting 8 per cent annually, and funds in Europe and Asia are targeting 5-per-cent returns.

However, the survey also found that 36 per cent of fund managers do not believe they will be able to achieve those targets over the next five years – a number that jumps to 40 per cent in Canada and 51 per cent in Europe.

"They've lived through the last decade and they've lived through this environment of lots of volatility, low returns, [interest] rates going down and liabilities going up dramatically, and all of a sudden they're saying, 'We need to reconsider what we're doing,'" Mr. Young said. "To me, it's a recognition that we have an issue."

Mr. Young said one of the most striking Canada-specific findings is that 36 per cent of public-sector plans say their greatest challenge is matching their assets with their liabilities so they can remain as close to fully funded as possible. Only 9 per cent of U.S. public-sector funds identified the same issue as their top challenge.

In place of the old model, pension managers are organizing their investments differently, looking at models that group assets by their risk or return profiles.

In Canada, for example, more than 60 per cent of plans said they have either adopted new liability driven investment (LDI) models or are planning to do so. LDI investing involves choosing assets with long time frames – such as real estate or very long-term bonds – that have payouts that match the long-term nature of pension obligations.

Pension plans are also seeking alternative assets that they believe can earn higher returns, including real estate and infrastructure investments. Eighty per cent of survey respondents believe picking the right regions of the world in which to invest will be the primary source of future returns. And despite years of market volatility eroding pension assets, 29 per cent said they would use more aggressive investment categories, such as emerging market equity or debt.