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European pension plans restructuring business models, says Amundi

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The unprecedented scale and speed of sell-off after the Lehman collapse killed the old dictum “fix asset allocation and the numbers will follow”, according to a survey by Amundi Asset Management and CREATE-Research.

Based on a sample of 190 pension plans across Europe with combined assets of EUR1.9 trillion, this survey shows that now only 50 per cent of portfolio returns came from intelligent asset allocation. The rest is attributed to implementation, seen as the alpha behind alpha.
 
“Investors no longer manage risk, they manage uncertainty: the first relies on known probabilities of future returns, the other on guesswork,” says Pascal Blanqué, chief investment officer of Amundi Asset Management. “Pension plans have been enjoined to explore new horizons in the belief that markets are unlikely to normalise any time soon.”
 
With markets being driven more by politics than economics, valuations remain severely distorted. An investment strategy is only as good as its implementation. Accordingly, around 50 per cent of pension plans have adopted significant changes in three areas of their business models: asset allocation, governance practices and execution capabilities.
 
The survey reveals that diversity now characterises the asset allocation models. Governance is acquiring a pivotal role to secure nimbleness in today’s real-time markets driven by 24-hour news cycles. Changes in the execution capabilities aim to minimise the gap between expected and actual returns, between ex ante promises and ex post outcomes.
 
The scale of changes is extensive and rely on new skills and new mindsets that take time to develop.
 
Funding levels and target return along with cash flow status are driving asset choices and risk appetite.  The one-size-fits-all approach to asset allocation is history. Three approaches are evident: product focused, time focused liability focused, each with distinct aims.
 
The changes in the pension business models have created new needs. Their success rests on a new form of implicit contract between pension plans, their consultants and asset managers.
 
“Without greater collaboration between pension plans, their consultants and their asset managers, the new changes risk being as durable as the crisis that provoked them,” warns the survey’s author, Amin Rajan, CEO of CREATE-Research. “It is one thing having new asset allocation models for a new age, quite another making them work.  It’s time to leverage the collective expertise in the pension value chain.”
 
That requires pension consultants to develop a deeper understanding of their clients’ long-term goals and risk tolerances. It also requires asset managers to develop capabilities that capitalise on the opportunities emerging from deleveraging now in progress in the West.
 
Changes have benefited from strong tailwinds from the market recovery since 2011. The real test will come when markets go into turmoil. Most of the changes have not yet been tried and tested by time or events. 

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