U.K. defined benefit fund assets are likely to expand over the next decade, but opportunities for money managers in terms of investment strategies “will shift as the market matures,” according to a Greenwich Associates survey.
Fixed income will continue to draw inflows, particularly among corporate DB plans. A quarter of the respondents from corporate pension funds are planning to increase active strategies in the next three years, according to Greenwich's 2012 U.K. Investment Management Study. In a low-yielding environment, higher-return products including emerging markets debt and high-yield bonds will dominate, according to the survey.
Among corporate DB plan respondents, 24% said they're likely to increase active fixed-income strategies, while 14% said they plan to raise their allocation to passive fixed income.
For local authority pension funds, alternatives are likely to be the main attraction over the next three years. About 24% of the respondents from local authority pension funds plan to increase exposure to infrastructure, with 15% expecting to appoint infrastructure managers in the coming year. About 12% of local authority pension plans are expecting to raise their exposures to real estate and private equity.
Among corporate fund respondents, demand for alternatives is slightly lower, with 5% planning to increase exposure to real estate and private equity.
Diversified growth strategies are also gaining traction among local authority pension funds, with 10% of respondents planning to raise exposure in the coming year, according to the survey.
Liability-driven investing strategies also garnered interest from all respondents. While investors are currently reluctant to implement LDI because of unattractive pricing levels, “the future growth of LDI is not a question of if, but when,” according to the survey. However, investors are moving away from “set-and-forget” LDI “toward more dynamic and flexible approaches that exploit a broad spectrum of instruments to actively manage risk,” according to the survey.
Separately, the life of the average DB plan is about 35 years, according to the survey, with the pace of DB plan closures slowing. Twelve percent of all those surveyed anticipate closure to future accruals within the next two to three years. In comparison, 15% of those surveyed two years ago said they expected closure.
The survey of 353 senior professionals at corporate, local authority and other institutional funds was conducted from January through March.
