European pension schemes are turning to cash and away from equities as funding ratios improve, a survey of the continent’s defined benefit (DB) plans from Goldman Sachs reveals.
Over the past two years financial conditions have driven a massive improvement in DB funding ratios, with the aggregate rate reaching 120 per cent for plans in Europe, while in the UK ratios are at record highs of 134 per cent, affording trustees the luxury of dialling down risk and ramping up liquidity.
All UK pension funds responding to the Goldman Sachs’ survey say they are either increasing or maintaining their cash allocations. Meanwhile, none of the trustees say they plan to increase their allocations to developed market equities, while 38 per cent plan to decrease.
Investment grade debt and private credit are also on European DB plans’ list with nine in 10 survey respondents planning to increase or maintain these allocations to these sectors, with 70 per cent of pension investors believing private credit has the potential for increased returns without a corresponding increase in volatility.
Fadi Abuali, CEO of Goldman Sachs Asset Management International, says: “Given sharp increases in yields and cooling inflation, managers are leaning into investment grade debt and private credit. We expect to see a continued increase in fixed income allocations across public and private markets, as pension funds trim their exposure to more volatile assets such as equities in favour of more stable income-generating investments.”
The survey also shows an appetite for ESG. The vast majority (87 per cent) of European pension funds class sustainable investing as critical or important in their decision-making, and 63 per cent allocate more than 10 per cent of their portfolio to responsible strategies.
Looking to the biggest risks to portfolios, more than 70 per cent of European pension funds point to the ongoing geopolitical turmoil as a major concern. However, 60% of schemes also say the investment climate has improved.
Abuali says: “European pension funds managers are at a pivotal moment. Many are optimistic about the investment climate, yet the economic outlook is uncertain, with higher-for-longer rates, divergent growth paths around the world and elevated geopolitical risk.”
Given the ever-lengthening to-do lists of those on the frontline of pension fund decision making, Goldman Sachs say the trend towards outsourcing investment portfolios to third parties will gather pace.
Seven in 10 respondents plan to outsource some or all of their investment portfolios in the next year, which follows some high profile moves to Outsourced CIO models (OCIO) in recent months.
Last October, BAE Systems chose Goldman Sachs as OCIO for its two DB pension funds worth GBP23 billion, marking the biggest ever deal of this kind.
Céline van Asselt, Head of Fiduciary Management at Goldman Sachs in Continental Europe, says: “We expect to see more outsourced asset management. Today, trustees must contend with new regulatory requirements, more vocal stakeholders and rising reputational risks. Pension funds’ resources have not increased to match this complexity.”
She adds: “The investment climate remains uncertain, with higher-for-longer rates and slower growth expected in most advanced economies, but opportunities abound in public and private markets for investors with a diversified and risk-conscious approach.”
