Global pension fund executives over the next three years will be upgrading their governance structures and board education, increasing internal staff overseeing risk and investments, and adding to investments in ESG, hedge funds of funds and real estate, said a State Street Corp. (STT) survey.

A report on the survey, “Pensions with Purpose: Meeting the Retirement Challenge,” said 92% of defined benefit and defined contribution plans, both corporate and public, expect to upgrade their governance models, and 45% will increase training and education for board members.

The survey also found:

  • 83% of respondents have at least a moderate interest in environmental, social and governance investments, and more than two-thirds of them are more likely to hire a money manager with ESG capabilities;
  • about 50% plan to increase their investments in hedge funds of funds and real estate, with slightly less saying they will boost private equity, infrastructure, direct loans and direct hedge funds, but 46% of all respondents said they want more transparency on the risks associated with those investments;
  • 45% are looking to derisk their investments, while 36% are ready to take on more investment risk;
  • 48% will increase the size of their internal risk management teams, and 45% will add to their internal investment teams; and
  • 80% of those with more than one retirement plan expect to combine their retirement plans in some way to cut costs and improve efficiency and governance.

The survey results show the pressures plan executives face in balancing investment returns with risk assessment and better board oversight, Martin Sullivan, Boston-based senior vice president and head of State Street Global Services’ institutional investor services unit, said in an interview.

More recent trend

The emphasis on ESG investing is a more recent trend, Rob Baillie, president and CEO of State Street Trust Co. Canada, Toronto, said in the same interview. Much of that could be driven by regulatory factors. For example, a new rule in Ontario starting Jan. 1 will require all occupational DB plans in the province to disclose their ESG investment policies.

But Mr. Baillie said the need for improved governance was a main takeaway from the survey.

“I think the challenge here is the governance priority,” Mr. Baillie said. “We were surprised (by) how many plans said they needed to upgrade that. It’s really become a brave new world in striking a risk-return balance, and pension plan executives are putting more emphasis on overseeing that.”

Mr. Sullivan agreed: “We can see an overarching pressure to deliver results, and that’s reflected in the questions about governance and in new ideas in efficiency.”

He said many plans are looking at “creative ways to leverage their assets and building governance,” whether it’s merging the retirement boards of different plans, choosing to freeze DB plans or tapping the investment knowledge of DB plan investment officials and applying that to DC options.

“Defined benefit and defined contribution plans are looking at the intellectual acumen they’ve built up over the past 30 years in DB investing and how to take all that knowledge and apply it to their DC plans,” Mr. Sullivan said. “They’re packaging up and unitizing their $30 billion in investments, and offering it as a (DC) investment option.”

Among other survey findings, 20% of respondents said they’re highly effective at managing investment, liquidity and other key risk areas, with the remaining 80% saying they have knowledge of key risks but need “more work to reach the highest level;” and 65% said they will continue to use external investment consultants.

Four hundred executives at plans from 20 countries and assets ranging from less than $500 million to more than $10 billion were surveyed in October and November; only some of them were State Street clients.

Source: Pensions & Investments