UBS Global Asset Management has published Pension Fund Indicators 2013, a study of UK pension fund investment.
The annual report, now in its 41st edition, analyses the latest trends in investment strategy, backed up by extensive data tracking long-term asset allocation and other relevant statistics, such as funding ratios.
The first chapter, “Current thinking in UK pensions”, highlights recent trends in the UK pensions’ industry and the key challenges facing pension scheme trustees. A major theme is the need for both growth and income, with the combined pressures of funding deficits, declining contribution rates and low bond yields making it increasingly difficult for pension schemes to meet their current and future commitments.
Despite these challenges, the current investment environment has also presented new investment opportunities, such as real estate and infrastructure debt. These asset classes have a role in liability management given their long-term, stable income streams that keep pace with inflation.
Ian Barnes, head of UK & Ireland for UBS Global Asset Management, says: “Whilst this year’s study shows that pension funds’ allocation to alternatives has stabilised, the impact of bank and government deleveraging has brought new opportunities within the alternatives area, including real estate and infrastructure debt.
“The current market opportunity suggests that there is a GBP24bn UK commercial mortgage funding gap and the OECD estimates global infrastructure requirements to 2030 to be around USD50trn. We believe this market environment presents unprecedented market opportunities for non-bank debt providers and investors. Infrastructure and real estate debt are attractive because of their expected return profiles, risk and broader inflation-linked characteristics, which generally align with the needs of pension funds.
“These are the latest in an ever-evolving range of alternative investments. We expect to see more and more such products made available as market dynamics lead to opportunities for the smart investor. The challenge is to have a robust enough governance structure to take advantage of these investments. For those that do, the benefit could be quite significant.”
Pension Fund Indicators 2013 also explores the following trends in its opening chapter:
· The shift away from DB to DC continues, however concerns remain over the lack of guidance for members, particularly in terms of how much they need to invest.
· The smart beta phenomenon is a helpful reminder for trustees to consider what can be systematised, and what they are paying their active and passive managers for.
· While regulations continue to have clients’ best interests in mind, there may be unintended consequences such as managers deciding against launching UCITs funds, or fees increasing to account for the growing cost of regulatory compliance.
· As the public sector workforce shrinks, local government pension schemes are experiencing drastically falling contribution rates; the situation is exacerbated by members ceasing their monthly contributions.