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Are Pensions Planning to De-Risk Funds?
Ruth Sullivan of the FT reports, Pensions plan to de-risk funds:
UK pension funds plan to reduce risk-taking on assets and liabilities in the next decade.
Nearly
three-quarters of defined benefit pension schemes aim to de-risk their
funds, according to a survey of 200 schemes, carried out by Aon
Hewitt. Bigger schemes plan to do this by becoming self-sufficient
without relying on sponsors for payment of benefits, while smaller ones
want to buy out thebenefits from an insurance company.
“Nobody
wants pension risk any more. Trustees and sponsors do not want pension
funds to turn around and bite them, they want out,” said Kevin
Wesbroom, at Aon Hewitt’s global risk services.
On
the asset side, funds plan to move away from equities, especially UK
companies, favouring property, hedge funds, commodities, currency and
infrastructure. They will increase their exposure to bonds and use
other liability-driven investment strategies.
However,
in spite of intentions to de-risk, trustees need to reduce deficits.
Although aggregate deficits among FTSE 350 companies fell over 2010
from £80bn ($128bn) at the start of the year to £40bn at year end,
further reduction is needed.
“Balancing risk and reward has
never been easy. Pension funds face the dilemma of having to continue
to run risk in the short term in order to get risk off the table in the
long term,” said Mr Wesbroom.
The
research shows 43 per cent of pension schemes realise they will have to
extend their time-scale to reduce deficits. In the past few years this
has increased from five years to eight years and this year is expected
to rise to 13 years.
There has also been a steady rise in the
number of plans closed to both new and existing members, from 12 per
cent in 2008 to 29 per cent last year while over half of respondents
expect to close schemes to existing members this year.
The
de-risking of mature pension plans is a long-term trend. As pension
plans mature and start paying out more in benefits than they receive in
contributions, they try to match assets-to-liabilities a lot more
closely, meaning they start moving away from risky assets to get into
other assets which provide more steady cash flows.
Of
course, asset-liability matching isn't an exact science, but mature
pensions can't afford to go through another severe drawdown like they
did in 2008. As the article states, further reduction in pension
deficits are needed. That's a big reason why central banks around the
world (led by the Fed) have been targeting asset reflation and mild
inflation. If inflation expectations pick up, rates will rise
(hopefully) at the same time that assets are rising. This will help
reduce pension deficits further.
So far, stock markets around the
world keep grinding higher which tells me pensions are in no rush to
de-risk their portfolios anytime soon. Skeptics abound waiting for the
next major downturn but I continue to believe that there is so much
liquidity in the financial system that the risks of a melt-up outweigh
those of a meltdown as another stock bubble gets underway.
There will be corrections along the way as markets get overextended,
but I think Chris Ciovacco of Ciovacco Capital Management is right, bears will be taken to the woodshed during the next correction.
A few more things to keep in mind while reading this article on
pensions 'de-risking' their portfolios. First, UK pension plans have the
highest exposure to equities
in the world. Second, mature pension plans have to reduce their
deficits which means they still need to take on equity risk in both
public and private markets. Asset-liability matching is easier to
implement once pensions are close to fully funded status but most
pensions are far from being fully funded. Finally, de-risking or taking
on more risk hoping that markets solve the problem are not a long-term
solutions for dealing with chronically underfunded pension plans.
Without serious reforms, pension deficits will continue plaguing company
and government finances, placing more stress on already fragile
retirement systems.
»
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The last melt down is still bigger than the current melt up.
Richard Russell said a few years ago that the next secular bull market after the death of the previous one would likely be even more amazing than the nineties. Richard Russell is not one to make such speculations idly, but it may start sooner than he thinks. Wouldn't that be something to see a huge melt up and a 30 percent return this year and back to the go go years of the nineties? Of course we may have a nagging inflation problem and perhaps an even bigger crash down the road, but Richard Russell has seemed to think when the next bull market gets seriously moving that it may put the nineties to shame. What would an S and P 500 with 35 PE to forward EBITDA look like in December 2012? You do the math!
Pension funds may be missing a big party.
I think Richard Russell thinks that before the greatest investment opportunity arises markets will have a whopper of a sell off. That will give those with cash a return that will put the 90's to shame.
Might the real risk actually be in fixed income/real estate/infrastructure?
Seems to me that these pension funds that want to 'de-risk' may actually be elevating risk in their portfolios.
If inflation hits, real assets will do well...if deflation hits, only nominal bonds will protect pensions
Leo,
Do you know the difference between "real" and "nominal"?
Are you guys serious or seriously drunK?!? Real-return bonds, real estate, infrastructure and commodities are inflation-sensitive assets. If deflation hits, only nominal bonds will protect your portfolio. And anyone who ignores what pensions are doing is missing the bigger ($24 trillion) picture!!!
Real estate isn't an inflation-sensitive asset until all the leverage dissappears from it. Otherwise, it is just a debt bubble-sensitive asset (and inflation destroys debt). Pension funds loading up on real estate are just walking straight into armageddon if they're loading up on real estate, thinking that is provides inflation protection.
In the extreme case of hyperinflation, entire appartment blocks could be purchased in Weimar Germany for a mere few ounces of gold.
I think he means non inflation adjusted bonds, i.e. anything but tips.
It's the same way the news articles he's discussing never note the differences between mean and median. God news has become so dumb. And in the case of the analysis brought by Leo becomes a garbage in and garbage out situation.
The guy can't even author a contribution without 95% of it being a cut-and-paste from someone else or a publication.
What do you think?
Furthermore, who give a shit what UK pension funds are planning? I'm 39 with my own family to care for. Do you think I give a damn if pensioners in the UK (or whever else) take it in the rump? Please.
I'm 39 with progressive multiple sclerosis, work 2 jobs and still blog at night to provide people with information through my pension lens. Damn right I cut and paste. Still have to find the articles, read them and comment on them. And still need to sleep at night so I can function the next day. I get zero from blogging. No ads, nada. If you got nothing good to say about my posts, do me a huge favor and keep quiet. A little respect, please.
How to de-risk that is the question?
Probably move to cash...
The real question is when? Timing is everything but I think it will be sooner rather than later.
Five bucks says they all hit the sell button in the same week causing a market sell off. This is exactly what happened in 2007 in the fall and 2009 the first quarter. Pension fund managers are chickenshits for good reason. If they don't push the sell button before someone else, someone else will.
cash?
depends on who's currency doesn't it?