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2016 themes expected to carry over into new year

Edward Krijgsman
Mercer’s Edward Krijgsman

Experts in a number of pension fund markets around the world expect to have in common this year several themes that drove their investment returns and funded status in 2016.

Plan executives will be looking for investment and funding strategies to help cope with ongoing political uncertainty thanks to upcoming elections in the eurozone and the new president in the U.S.

Risk management will remain an important consideration, and Mercer will be encouraging clients to stress-test their portfolios against large equity, bond and currency movement, said Phil Edwards, Bristol, England-based principal and European director of strategic research at Mercer Ltd. 

Mercer principal and investment consultant Edward Krijgsman, based in Amstelveen, Netherlands, agreed this is a recommendation for Dutch pension funds, too. “We think it is important for clients to perform some stress and scenario testing ... to model certain decreases of returns for different investment categories, what impact that will have on their investment portfolio, and therefore on their solvency ratio,” he said.

The theme of a reduction in longer-term return targets was also noted by consultants and research executives in Australia, the U.S., and Switzerland. A number of pension funds in Australia are “moving from a standard (consumer price index) plus 3.5% 10-year benchmark return to CPI plus 3% for their standard balanced investment option,” said Adam Gee, CEO at research firm SuperRatings Pty Ltd. in Sydney. This balanced investment option comprises a 70% allocation to growth assets, and 30% to defensive assets.

Daniel Blatter, senior analyst at Willis Towers Watson PLC in Zurich, said a reduction in target returns “is definitely a noticeable trend, pretty much across the board. Technical interest rates, used to value pensioner liabilities, and conversion rates (used to calculate benefits) ... continue to fall as pension funds struggle to meet their benefit promises without taking on significant additional investment risk.”

A number of U.S. public pension funds have been reducing their target rate of return. But there is another, bigger picture. Pension funds in the U.S. are “stuck in a rut” with regards to funded status, hovering around 80% since the financial crisis. “Go back to 2007 and we were at 106%, we were very well funded,” with plans on average in surplus, said Alan Glickstein, a senior consultant at Willis Towers Watson in Dallas. Following the crisis funded levels dropped to 77% in one year, “and all we have been able to do is inch our way back up,” besides a bounce in 2013 when the funded level reached almost 90%.

The issue is not that companies are not making contributions. “Even with that and pretty good equity markets, we are still not able to move the needle on pension funding to something that is healthier,” said Mr. Glickstein. “I think people managing these plans are struggling with "What do we do? Put more money in? Wait for interest rates to rise? Change investment strategy?'”

This article originally appeared in the January 23, 2017 print issue as, "2016 themes expected to carry over into new year".