Pension Plans Look to Active Equity Management

January 14, 2010 ( – Pension plan sponsors globally say active equity management will help them meet the challenges of current funding status, risk management, and continued volatility.

Almost nine‐in‐10 Canadian plans (88%) either strongly agreed or agreed with the statement, “We believe actively managed equity strategies will deliver alpha in the foreseeable future,” followed by 77% of Nordic plans, 76% of U.K. plans, and 70% of U.S. plans, according to a Pyramis press release about its global pension pulse poll. “The Pyramis Global Pensions Pulse Poll revealed that plans are seeking ways to return to equity markets after losses suffered in 2008 and the vast majority of institutional investors believe actively managed equity strategies, versus passive management, will deliver excess market returns in the future,” said Young D. Chin, Chief Investment Officer, Pyramis Global Advisors, in the press release.

Pyramis found many plans also are targeting increased global equity allocations, and have strong interest in emerging market equities. The strongest interest in increasing emerging market equity allocations was found in the Netherlands (50%) and the Nordic region (46%). In Canada and the U.S., 30% and 25% of plans, respectively, expect to increase these strategies.

In the U.S. and Canada, a strong interest in long‐duration fixed and corporate credit strategies reflects the continued growth of liability‐driven investing (LDI), Pyramis said. Forty‐three percent of both U.S. corporate plans and Canadian plans expect to increase long-bond allocations, while 22% of U.S. corporate plans and 27% of Canadian plans expect to increase allocations to corporate bonds.

Pensions are diversifying into alternative investments after many dipped below investment policy targets for these asset classes during recent market declines. In Europe, 32% of plans say they are definitely or likely to manage volatility by diversifying into alternatives such as hedge funds, infrastructure, or private equity. Strong interest in managing volatility through alternatives was recorded in Canada (50%) and among U.S. public DB plans (34%).

Across all three regions, interest in equity market neutral strategies is increasing as a preferred hedge fund strategy. Among other preferred single‐strategy hedge funds named were directional long/short, global macro, and multi‐strategy.

Funding Status a Top Concern

The Pyramis Global Advisors Pulse Poll found that in the U.S., four in 10 public plans (43%) reported funding status is their top concern, followed by the low return environment and its impact on their future growth (29%). U.S. corporate plans were split, ranking volatility (36%) and funding status (35%) as their top concerns.

Across Europe, plans ranked risk management/solidity ratios (a measure of plan solvency or funded status) (29%) and volatility (24%) as their top concerns. In Canada, current funding status was the top concern (42%) for plans. Canadian plans were also concerned about risk management (20%) and the potential impact of upcoming accounting and regulatory changes (14%).

Inflation concerns were highest among U.S. pension plan sponsors at 89%, followed by 85% of Nordic plans, 74% of Canadian plans, and 61% of U.K. plans. Interestingly, deflation concerns were highest among plans in the Netherlands (40%), while 32% of Swiss plans viewed deflation as a bigger risk than inflation in the coming years.

Pyramis conducted surveys of institutional investors during November 2009 including 217 U.S. pension plans (142 corporate, 75 public), 50 Canadian pension plans (28 corporate, 22 public) and 160 U.K. and Northern European institutional investors (80 private pensions, 36 public pensions, 19 insurers, 25 multi‐managers) in 10 countries (41 U.K., 36 Switzerland, 21 Netherlands, 13 Sweden, 12 Finland, seven Germany, seven Norway, six Austria, six Iceland, five Denmark and six others).

Total assets managed in plans represented by respondents exceeded $1 trillion. The surveys were executed in association with Asset International, Inc., in the U.S., Rogers Communications in Canada, and the Financial Times in the U.K. and Northern Europe.