Updated
The largest pension plans and public pension reserve funds worldwide are slow to move into infrastructure despite continuing to increase allocations to other alternative investments, according to a new report from the Organization for Economic Co-Operation and Development.
The OECD surveyed or reviewed 86 plans with nearly $10 trillion combined in assets. While the average allocation to alternatives increased to 15.6% at the end of 2012 from 14.4% at the end of 2010, infrastructure allocations had minimal changes. Of the 69 funds that responded to the survey, unlisted equity and debt infrastructure investments totaled $72.1 billion, or 0.9% of total respondent assets.
The majority of plans are not current investors, but “we definitely see interest from investors, even those that are not currently invested,” said Raffaele Della Croce, Paris-based economist in the private pensions unit at the OECD.
Mr. Della Croce said there are a number of reasons the take-up of infrastructure assets is moving slowly. Even the larger funds capable of making big bets are saying there is a lack of investment opportunities available, he said. Infrastructure investments also often lack data institutional investors seek, such as performance, track record and benchmarks, Mr. Della Croce said.
“All these issues investors are worried about at the moment,” Mr. Della Croce said.
Thirty-three funds reported a total of $64 billion in unlisted infrastructure equity, including about $19 billion alone from the Toronto-based $183.6 billion Canada Pension Plan and $61.8 billion Ontario Municipal Employees Retirement System. (All figures in the report are in U.S. dollars.)
Including infrastructure, large plans are effectively competing against each for opportunities in alternative asset classes as they look to deploy more and more assets, Mr. Della Croce said. On the flip side, the average allocation to equities has decreased to 28.3% at the end of 2012 compared to 32.2% at the end of 2010. In that same time period, fixed income and cash has increased to 56.1% from 53.4%.
Overall, asset allocations and investments in foreign markets are all over the map for the group of funds analyzed by the OECD.
The overall trends show a continued increase in allocations to alternatives and fixed income, and a decrease in equity holdings. Mr. Della Croce said it is definitely challenging to compare plans that often are structured and invested in very different ways, but value can still be found. Large pension plans and public pension reserve funds effectively are competing against each for opportunities as they look to deploy more assets in alternative asset classes, Mr. Della Croce said.
“Some of the funds are looking at new asset classes that could have important implications,” Mr. Della Croce said in a telephone interview.
In addition to the average 15.6% in alternatives, the plans also had an average 56.1% in fixed income and 28.3% in equity in 2012. At the end of 2010, when the last report was published, the average allocation for fixed income was 53.4% and for equity, 32.2%.
The OECD report highlights the large players that are still rooted in traditional investments compared with those seeking alternative and foreign investments.
For example, the $2.7 trillion U.S. Social Security Trust is the largest of the 86 plans, but is 100% invested in domestic fixed income. (All figures in this story are in U.S. dollars.) Belgium’s $25.3 billion Zilverfonds PPRF is also entirely invested in domestic bonds. Conversely, the two Canadian PPRFs surveyed — the Canada Pension Plan Investment Board and Quebec Pension Plan — with a combined $213 billion in assets, and the $85.7 billion Australia Future Fund all had allocations to domestic bonds of less than 35%. The Future Fund also has the highest alternative allocation of PPRFs at 36%. Sweden’s AP2, AP3 and AP4 funds, with combined total assets of $112.5 billion, all increased alternatives in 2012, according to the report.
Among pension funds, Russia’s $1.2 billion VTB Group plan is 100% invested in bonds and cash while Italy’s $9.7 billion Cometa fund is 90.5% invested. Denmark’s $51.7 billion PFA Pension and France’s $19.5 billion ERAFP have 87.6% and 77.5% allocations to bonds, respectively.
For public equity, equity, the $44.7 billion United Nations Joint Staff Pension Fund has the highest allocation for pension plans at 63.6%, followed by Brazil’s $81.4 billion Previ, 58.1%; South Africa’s $143.7 billion Government Employees Pension Fund, 54.8%; and the $130 billion New York City Retirement Systems, 53%.
Traditional asset classes comprise the majority of assets in pension funds domiciled in Latin America, Russia, Spain and Italy, according to the report.
Pension funds from Turkey, Portugal and Canada have the largest allocations to alternatives. Turkey’s $8.8 billion OYAK fund has the highest overall alternatives allocation at 50.7%, including a 31.9% allocation to private equity. Portugal’s $2.1 billion CGD Pensoes was second at 43.5%, including 39.9% in real estate. The Ontario Municipal Employees’ Retirement System has 40.1% allocated to alternatives, with a target allocation of 47%.
The average fund invested 39.5% in foreign markets. European funds, with the exception of some Portuguese and Spanish funds, and Canadian funds generally had a high amount of assets in foreign markets. South America, with the exception of Chile, was largely invested in domestic markets.
The USS had the highest allocation to public foreign equity among pension funds at 30.9%, followed by Italy’s $5 billion FONCHIM and the U.N. plan at 30.8% and 28.9%, respectively.
Three Portuguese funds had the highest allocation to foreign bonds, ranging from 62.9% to 58.6%.
Most PPRFs have large exposures to foreign markets, according to the report, outside of reserve funds in Argentina, Belgium, Poland, Spain and the U.S., Chile’s $5.9 billion Pension Reserve Fund is entirely invested abroad, while the Canada Pension Plan is 60% invested in foreign markets.
