So goes the message in a report from SEI’s Institutional Group, which finds that an overwhelming majority of pension executives see improved funded status as a benchmark more important than increasing absolute returns.
The “Quick Poll” survey released this month found that almost 90% of respondents pointed to managing funded status than any other issue. Additional priorities moving forward included improving funded status, creating a long-term pension strategy, stress-testing the portfolio, increasing due diligence, and defining the role of consultants and investment professionals providing advice to pensions.
The poll was completed by 85 pension executives overseeing assets ranging in size from $25 million to $10 billion. Of the respondents, 36% oversee more than $300 million in assets.
“Funding deficiencies are getting the attention of various stakeholders in companies and, as a result, boards and senior management are looking for long-term strategies as this scrutiny continues,” said Jon Waite, Director, Investment Management Advice and Chief Actuary for SEI’s Institutional Group.
The fact that pension plans, particularly in the corporate world, have been staring into the whites of some sort of funding crisis is nothing new. General Motors Corp.’s pension plan’s vastly underfunded status was a well-known problem back in 2005.
And it’s likely to continue. According to a recent column by Rogers Casey’s Adam Tosh, pensions have no choice but to make drastic concessions if they are to remain viable.
What is more recently of concern, particularly given how financial markets have been playing out this past year, is whether pensions can staunch the losses they are experiencing not only from terrible market conditions but from the accelerating issue of having to pay out more than they are bringing in or can earn a return on.
All of this is great news for hedge funds, according to SEI’s survey. Given how far underwater many pensions are finding themselves, they are looking to alternative investments to both maintain and bolster their funding status. Indeed, SEI’s survey indicates a significant increase in the percentage of pension portfolios investing in alternatives when compared to the previous two years. The chart below illustrates an upward trend of the use of alternatives in pension portfolios.
In 2008, 51% of pension executives surveyed in an SEI Quick Poll said their pension portfolio was invested in alternatives. In 2009, that percentage increased to 53%. This year’s poll, meanwhile, saw an increase to 65% of the poll participants. Use among pensions with more than $300 million in assets is significantly higher than those with less: 84% compared to 53%, respectively.
In addition to the increase in the percentage of pensions using alternatives, poll respondents from larger plans are investing a greater percentage of the portfolio in alternatives. Of those with more than $300 million in assets, more than three-quarters (77%) invest 11% or more in alternatives. By comparison, 42% of pensions with less than $300 million in assets invest 11% or more.
Real estate (77%), private equity (54%), funds of hedge funds (47%) and single manager hedge funds (30%) are the most common alternatives being used, according to respondents.
For many, however, the writing is already on the wall: In response to recent economic conditions and changing priorities, some pensions are now closed to new entrants, while accruals for current participants have ended. According to poll respondents, more than half (53%) of pension plans are either closed or frozen, approximately a 10% increase from a year ago.
Still, funding deficiencies weren’t the only factor preventing organizations from terminating their plans. Respondents were asked that if their plan was fully funded, would they still look to terminate the plan as soon as possible. Of those that already have frozen their plan, nearly three-quarters (73%) said they would look to terminate the plan. Of those with active plans, 75% said they would not look to terminate it.
So the good news is that hedge funds are likely to continue to benefit from pensions’ needs to diversify their portfolios and keep their assets at minimum matching their liabilities. The bad news, if SEI’s numbers hold true, is that corporate pension plans rife with benefits and lots of retirement income for those who put in their years of service, may increasingly become a thing of the past.