The world’s defined-benefit (DB) pension funds are moving toward two very different futures, according to a recent report from BlackRock, based on a survey conducted for it by the Economist Intelligence Unit, titled Common Challenges, Diverging Paths: winding down and building up in global defined benefit pension. The report, which secures responses from 300 funds worldwide, explores the winding down of corporate defined benefit (DB) plans and the building up that public and other non-corporate DB plans are doing to strengthen themselves for the long run.
“More and more corporate DB sponsors have chosen to wind down their DB plans, while many non-corporate plans are shoring up their models to better serve their participants over the long haul. These basic storylines are playing out around the world, albeit with plenty of local variation resulting from regulatory, cultural and other factors,” writes Edwin Conway, global head on BlackRock’s institutional client business, in an introduction to the report. He adds that this dichotomy is no secret, but that it is under-examined.
“We see client portfolios growing ever-more complex and ever-more focused on their specific direction, whether that’s de-risking or longer-horizon investing. We also see the pension organizations themselves evolving to support the effort as they move down these paths. What we hadn’t seen was a study that compared these developments side by side, which was why we decided to do one,” Conway explains in an email to Institutional Allocator. “We found some common concerns that are driving major change across the investing landscape. A good example here is the way both corporate and public DB plans are rethinking the respective roles of index-based, factor-based and alpha-seeking strategies.”
The report does reveal some striking contrasts. It says that while nine out of 10 of the non-corporate plans that participated in the survey are open to new members, the same is true for only about one in 10 of the corporate plans. Also, geography and size make for further variety. Nearly three quarters of corporate plans overall say they are de-risking, but the proportion rises above 90% for U.K. plans and above 80% for U.S. plans. And among non-corporate plans, size is correlated with change on several important fronts, with larger plans (those with more than $25 billion in AUM) more likely to have added staff and revised board and staff roles than plans with less than $10 billion in AUM.
More and more corporate DB sponsors have chosen to wind down their DB plans, while many non-corporate plans are shoring up their models to better serve their participants over the long haul.
Spoiler alert: Among the report’s key findings are that change is a major focus as both types of pension funds strengthen governance and investment policies. Nearly three quarters of the pension funds that participated in the survey have created or revised risk-appetite statements and investment-belief statements in the last three years, the report says. And while these best practice tools are not new, their prevalence and prominence appear to have increased. More than 70% of respondents say they have enhanced risk analytics, and 72% have created or revised investment belief statements.
Monitoring fees is another major focus, according to the report. Many plans would apparently take more such steps if they could. By far the biggest barrier to governance and investment policy improvements, especially on the public side, isn’t an absence of consensus or expertise. Rather, it is a lack of financial resources, cited by 69% of non-corporate respondents, the report says.
Other findings include:
- Both types of pensions are rethinking the respective roles of index-based, factor-based and alpha-seeking strategies.
- The majority of corporates are de-risking, and runoff on the balance sheet is the likeliest endgame.
- Multinational corporates are coordinating national plans—and in some cases pooling assets—to benefit from scale.
- Consolidation pressures on smaller non-corporate plans may increase.
- Non-corporates are relying more on private assets and enhancing their ability to invest in them.
- The move to ESG investing is gaining momentum, with the U.S. apparently catching up to Europe.
- Both types of pensions expect a greater role for hybrid approaches that combine defined benefit and defined contribution elements.
Using factors to efficiently target returns and diversification is increasingly common among both types of plans, according to the report. Seventy four percent of respondents employ investment strategies that target one or more factors, while 61% use factors to understand risk and return.
On the public DB side, apparently size matters. The report says plans with in excess of $25 billion in assets under management are more likely to have added staff and revised board and staff roles (74%) than plans with less than $10 billion in AUM (42%).
Also of note, hybrid DB-DC plans may grow in popularity over the medium term. The report says that 78% of corporations expect their DC plans to employ some strategies available to the DB plan, while 83% of non-corporates expect to offer a DC plan of some kind.