Financial resources shortage is ‘biggest barrier’ to changing governance and investment policy for DB plans

One of the “biggest barriers” to changing governance and investment policy for defined benefit pension plans is the lack of financial resources, BlackRock has found.

According to BlackRock’s Common challenges, diverging paths, study on corporate and non-corporate pension schemes, around 65 per cent of participants explained that the shortage in financial resources has been the biggest barrier to changing governance and investment policy.

The study, which surveyed 300 senior executives of pension plans as well as interviews with CIO’s, highlighted that over the last three years, 74 per cent of pension plans have created or revised a risk appetite statement, while 72 per cent have created or revised an investment belief statement. A further 70 per cent enhanced their risk analytics and 69 per cent increased their scrutiny of investment fees.

While risk and investment appetite is evolving, BlackRock noted that a number of CIOs have mentioned that the potential appetite for risk transfer deals far exceeds the current capacity of insurers to take them on.

Overall, three out of four, 73 per cent, of corporate DB plans have a de-risking strategy in place, and nine out of 10 in the UK. Comparing plans further, the largest plans were found to be more than twice as likely to have a de-risking plan as the smallest ones, $25bn-plus in AUM, compared to less than $10bn in AUM.

Considering consolidation of schemes, the survey found that 78 per cent of corporate plans globally have already begun to implement cross border coordination of DB plans. From these, 39 per cent have introduced common investment strategies or managers, while an added 26 per cent have taken on common strategic asset allocation for some or all plans. Only 11 per cent of participants have consolidated assets and one fifth, 22 per cent, of corporate plans do not expect to see any cross border coordination.

With consolidation pressures likely to increase, currently greater numbers of larger schemes are engaging with consolidation plans and adding needed resources than smaller funds.

Also looking at investment strategy patterns, BlackRock found that the majority of participants said that 40 per cent or more of their equities are managed through index funds, in addition to over a quarter that manage 40 per cent of more of their fixed income in index mandates. Almost three fifths said they expect to increase index-based equity or fixed income.

A total of 74 per cent of participants use factor-based investment strategies, and a further 61 per cent said they use factors to help understand portfolio risk and return.

BlackRock institutional client business global head Edwin Conway commented: “It is not surprising to see the number of pension plans investing in factor-based strategies, given the variety available, but we expect to see further growth in the number of plans that are using factors to inform their asset allocation decisions. Factors can be an important tool for pension plans in understanding their risk and return. The insight can be invaluable in determining which strategies are efficiently targeting plan goals, and which could be replaced by lower-cost, better-diversifying strategies.”

Adding to this, the survey identified that there is a growing trend in private asset investment for both public and non-corporate plans. BlackRock noted that the rising allocations to private equity and credit, real estate and infrastructure, as recorded in the last five years, is being maintained.

Conway added: “Pension leaders today are on the front lines of a historic and urgent transition in how societies provide for retirement. Managing this changing environment, seeking efficient and higher-yielding investment styles and tackling challenges stemming from new regulatory and governance regimes will be key for both corporate and public pension schemes. While in many areas their paths are diverging, they both play a crucial role in reshaping global retirement.”

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