Pension funds increase risk appetite
More than 75 per-cent of pension funds plan to increase their risk appetite over the next three years with a growing number bolstering their allocations into alternative asset classes such as hedge funds and private equity, according to a study by State Street in conjunction with The Economist Intelligence Unit.
Twenty-nine per-cent of pension plans already invested in hedge funds planned to up their exposures while 25 per-cent said they would invest into the asset class for the first time. Sixty per-cent confirmed they would increase their private equity allocations and 46 per-cent said they would bolster their real-estate investment portfolios.
Pension funds are under enormous pressure to boost returns amid growing deficits in a low interest rate and a low return environment. The Pension Protection Fund in the UK estimates 6,136 public and private pension schemes are struggling with deficits and liabilities of around £1.3 trillion as of May 30, 2013.
These findings come following the decision by several high-profile pension plans to withdraw from hedge fund investing. CALPERS, the largest US public pension fund, withdrew $4 billion from 24 hedge funds and six funds of hedge funds in September after criticising the industry for being too complex and costly. A handful of other pension plans are also reducing or terminating their hedge fund exposures including the Los Angeles Fire and Police Pensions System, San Diego County Employees’ Retirement Association and Louisiana Firefighters Retirement System.
It was also reported that the £4.5 billion London Pensions Fund Authority (LPFA) said it sympathised with CALPERS’ decision, adding that hedge fund fees were unjustifiable. The LPFA notably withdrew from Brevan Howard earlier in the year after the $37 billion manager refused to meet the pension plan’s transparency requirements.
Hedge fund performance has also been lacklustre. Data from the Chicago-based Hedge Fund Research found the average manager had delivered gains of 2.2 per-cent in 2014. Meanwhile, private equity has proven solid. Preqin, a London-based data provider, found the average private equity fund delivered returns of 18% for the one year period to December 2013. Over a ten-year period, private equity has produced median net internal rate of returns (IRRs) of 20%, continued Preqin.
The State Street study also highlighted 81 per-cent of pension plans intend to increasingly in-source their asset management. Cost was cited as the biggest factor behind this. A survey of 19 of the world’s largest pension funds by CEM Benchmarking showed pensions spent 46 basis points (bps) on external fund management compared to eight bps on internal fund management. A growing number of large pensions are increasingly finding themselves in competition with large fund houses.
This in-sourcing trend comes amid growing scrutiny towards fund management costs at pension schemes. Research on pension fund costs by Thomas Murray IDS, and published in the Financial Times in May 2013, highlighted fee discrepancies among pension schemes. This disparity was evidenced when comparing two UK local government pension schemes – each with similar returns, asset allocations and size. The research found that one of the schemes paid three times as much in fund management costs than the other despite their analogous characteristics.
“Pension schemes are starting to scrutinise the fees that they are paying their investment managers, although objective benchmarks and comparators are difficult to obtain. It is unsurprising therefore that some of these large, institutional pension funds are selecting to in-source their asset management,” said Nick Bradley, managing director at Thomas Murray IDS.