Wellington Management Wins Best Pensions Paper 2021
Pension funds face many of the same challenges, with de-risking, lower asset market returns, and the conflicting demands of plan participants, regulators, and plan sponsors all vying for attention. Wellington Management’s winning paper seeks to address the issue of liability hedging with new insights and suggestions that may help mitigate some traditional constraints. However, one thing is clear, many of the observations and trends featured in these papers will be with us for years to come.
WINNER: WELLINGTON MANAGEMENT
Recent volatility in markets has many DB schemes reassessing liability-hedging allocations and considering new de-risking ideas. Wellington Management’s LDI team have revised and updated their analysis to complement traditional thinking about liability hedging benchmarks. They contemplate new opportunity sets and allocations from among a wider set of asset classes than might normally be considered as potential solutions to mitigate credit risk or enhance returns.
A range of investment and spending strategies for retirement are evaluated in this paper from Dimensional Fund Advisers. Strategies cover a range of approaches, including wealth-focused glide paths combining equities with short duration bonds and an approach using LDI principles with an inflation-protected bond portfolio. They find that an income-focused asset allocation not only provides similar income but also offers better risk protection.
Thinking Ahead Institute’s Global Pension Asset Study encompasses 22 of the world’s major pension markets, which account for over $52 trillion in assets. The study includes a more detailed analysis of the seven largest markets (the P7), comprising 92% of total pension assets. The paper also suggests a range of issues that funds should consider and prioritise as the pensions space evolves over the coming decade.
For compliance reasons, this paper is NOT accessible in the United States and Canada
This research report from LGIM is based on data collected from 15 asset managers in the auto-enrolment DC space, with assets exceeding $19 trillion. The report examines the capabilities and credentials of managers in the UK DC space and seeks to unravel some of the layers of complexity that have arisen as sustainable investing has become more mainstream. How products and strategies implement ESG considerations is considered, with the aim of better understanding of how these might impact long-term investment returns.
Mercer’s Asset Allocation Insights report incorporates information from 16 growth markets across Latin America, the Middle East, Africa, and Asia, accounting for over $5 trillion in assets under management. It aims to shed light on how investors are adapting and evolving to serve both local and international markets, and how this potentially impacts the implementation of investment strategies. Growth market investors face many of the same pressing issues experienced among developed market counterparts.
As of 30 Sep 2020, the median funded ratio of S&P 500 corporate pension plans stood at 83%. Corporate plans need to grow assets and generate sufficient cash flow to honour promised benefits. Nuveen's paper shows that many corporate plans don’t use a factors-based approach, leading to sub-optimal outcomes in asset growth. They argue that by targeting a combination of risk factors to optimise the growth of assets over liabilities, portfolio asset allocation becomes a natural by-product of the process.
For compliance reasons, this paper is only accessible in the United Kingdom
LCP’s latest annual pensions de-risking report finds fewer than 30% of UK schemes over £1 billion have taken any de-risking steps. A huge amount of longevity risk needs to be addressed in the coming years; estimates suggest a figure of up to £650 billion. This report illustrates practical de-risking strategies and suggests potential glide paths for those seeking to de-risk in stages. LCP also review existing market trends, including the approaches insurers are taking to ESG and climate change.
Thinking Ahead Institute’s annual study of the world’s largest pension funds provides insights into trends in the pension industry and highlights key changes in the biggest funds. Investment models are being aligned with systems-thinking, and technology, culture and governance are seen as being key to the transformation that is underway. Lower returns have raised solvency concerns, with risk budgets being stretched, with increasing allocations to private assets particularly noteworthy.
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