Asset Allocation Shifts at Pension and Retirement Plans

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1 Asset Allocation Shifts at Pension and Retirement Plans A report prepared by the Institutional Investor Custom Research Group in conjunction with AMP Capital

2 Contents Welcome Executive summary About this research Welcome to the fourth issue of the In this report, we examine trends in asset allocation, investment, and portfolio construction specifically at pensions and other retirement plans worldwide. After conducting a survey of senior investment decision makers, we now present and interpret the data collected about their institutions, with a particular focus on the reasons they choose to shift asset allocations. Investors endorse nonmarket-driven strategies and alternative assets Concerns and allocation responses over the past 12 months Concerns and allocation responses over the next 12 months This issue includes findings on: Retirement plans allocations to equities, fixed income, and alternatives as of July 2014 Changes in these allocations expected over the next 12 months The top concerns among investment decision makers at retirement plans On behalf of AMP Capital and Institutional Investor Research, we d like to thank the portfolio managers and other investment professionals around the world who contributed to this research. We invite readers of this report to contact us with comments and questions. It would be our pleasure to hear from you. Specific asset allocations: Today and tomorrow 13 How allocation decisions are made at pension and retirement plans 18 Anthony Fasso Chief Executive International and Head of Global Clients AMP Capital Sydney, Australia Seth Greene Senior Research Editor Institutional Investor Custom Research Group New York, New York Use of external, third- 20 party asset managers Regional findings 22 AMP Capital Institutional Investor Custom Research Conclusion: Improving the allocation decision process 26 If you have questions or comments about this report or AMP Capital, please contact If you have questions or comments about this report or Institutional Investor Custom Research, please contact Seth Greene at Contact information 28 For a PDF file of this or any past report in the series, please visit Copyright Institutional Investor LLC All rights reserved. All text and content of this research report are the exclusive property of Institutional Investor. The research and commentary in this document are intended to highlight results, trends, and patterns among the respondents in this study. In no event should the content of this report be construed to constitute an investment recommendation or managerial advice from Institutional Investor or AMP Capital, which sponsored this study. 2

3 Executive summary Financial markets around the world have enjoyed relative stability and strength in recent months. With equity prices near all-time highs, the major indices have remained nearly flat or have gradually climbed. Price volatility on the primary exchanges has been especially low, and central banks have continued to delay interest rate increases. Investors appear to be enjoying a period of relative calm after several years of high volatility and uncertainty regarding market behavior and interest rates. With these market dynamics as the backdrop, we focus in this study on the motives and rational for changes in asset allocations at pension funds and other retirement plans. We find the following: Decision makers at retirement plans worldwide show a strong preference for nonmarketdriven strategies and alternative investments as ways of increasing returns and decreasing risk. Decision makers at retirement plans worldwide show a strong preference for nonmarket-driven strategies such as absolute-return strategies and inflation-plus instruments and alternative investments as ways of both increasing returns and decreasing portfolio risk. Their current enthusiasm for alternatives continues a trend seen in recent issues of the AMP Capital / Institutional Investor Research Report. Over the past 12 months, survey respondents have been most concerned with increasing returns, reducing overall risk, reducing asset correlation, and reducing volatility exposure. In response, retirement plan decision makers most frequently report having increased their allocations to alternative assets in an effort to deliver higher returns and to gain insulation from the asset correlation and volatility of the publicly traded markets. For the next 12 months, respondents see these same concerns as most pressing. In response, retirement plan portfolios are expected to continue to migrate toward alternative investments. Today, respondents average asset class allocations are broadly distributed as follows: 46% to equities, 38% to fixed income, 14% to alternatives, and 2% to cash. From this starting point, the average allocation changes expected for many plans over the next 12 months are small percentage-point shifts into alternatives and out of equities. Respondents currently have, on average, 56% of their assets managed by external, third-party managers, a proportion they do not expect to change over the next 12 months. Retirement plan decision makers generally express confidence in their external asset managers usually in their expertise and, for all but the largest plans, in the cost savings they offer versus managing assets in-house. By a wide margin, internal investment-management teams initiate more asset allocation changes at retirement plans than do regulatory changes, third-party investment managers, the plans boards, or their sponsoring organizations. Most plans can formulate a strategy to execute an allocation change in four months or less. 3

4 Respondents in the different regions prefer different strategies to increase returns over the next 12 months. Those in North America favor increasing allocations to alternative assets. Those in Europe prefer using a broader range of investment strategies, including high-conviction and leveraging/ gearing funds. Finally, those in Asia-Pacific favor nonmarket-driven strategies, such as absolutereturn and inflation-plus instruments. Respondents most pressing concerns for the next 12 months are reducing asset correlation in North America, increasing returns and reducing overall risk in Europe, and increasing returns in Asia-Pacific. On a regional basis, respondents most pressing concerns for the next 12 months are reducing asset correlation in North America, increasing returns and reducing overall risk in Europe, and increasing returns in Asia-Pacific. In addition, those in all regions are concerned with decreasing volatility risk. In response, many retirement plans are expected to increase allocations to alternatives in North America, to fixed income in Europe, and to equities in Asia-Pacific. The average change to these allocations in each region, however, is expected to be small. Investment decision makers at retirement plans recommend speeding up the decision-making process regarding asset allocation changes, as well as making the process more independent from plans trustees and boards. Some respondents also recommend that plans make better allocation decisions by informing their choices with higher-quality research. A note about terminology In this report, we use the terms pension fund and pension plan to refer specifically to defined-benefit (DB) plans. We use the term retirement plan to refer more broadly to all types of plans that offer postemployment financial support, including DB plans, defined-contribution (DC) plans, hybrid DB-DC plans, cash-balance plans, superannuation funds, and others. 4

5 About this research In July 2014, Institutional Investor s Custom Research Group conducted a survey of senior decision makers at pension funds and other retirement plans to examine the reasons these institutions change their asset allocations. In total, 56 investors responded from institutions in North America, Europe, and the Asia-Pacific region (including Australia and Japan). Survey respondents represent large pension and retirement plans. Collectively, respondents plans manage an estimated US$1.9 trillion, with average AUM of US$35 billion. Survey respondents represent large pension and retirement plans 86% work for plans with US$1 billion or more in assets under management (AUM). Collectively, respondents plans manage an estimated US$1.9 trillion, with average AUM of US$35 billion (see Figure 1). Most respondents work at defined-benefit (DB) plans, with others employed by defined-contribution (DC) plans, hybrid DB-DC plans, cash-balance plans, and Australia s superannuation plans. The DB plans within this group have an average funded status of 82%. More than one-half of respondents plans serve current and former employees in the public sector. Figure 1. Respondents plan types, AUM, and beneficiaries Type of retirement plan Assets under management Percentage of respondents Plan beneficiaries Percentage of respondents 5

6 The survey includes respondents from North America, Europe, and the Asia-Pacific region (including Australia and Japan). By number of respondents, the highest proportion is located in North America. By AUM, however, the highest proportion is located in the Asia-Pacific region, largely due to responses from several of the very large retirement plans located there (see Figure 2). The survey includes respondents from North America, Europe, and the Asia-Pacific region (including Australia and Japan). Figure 2. Respondents regional distribution Regional distribution by number of respondents Asia-Pacific, 29% North America, 43% Europe 29% Percentage of respondents Percentages do not add to 100% due to rounding Regional distribution by assets under management Europe, US$216 billion, 11% North America, US$479 billion, 25% Asia-Pacific, US$1,239 billion, 64% Percentage of assets under management 6

7 Investors endorse nonmarket-driven strategies and alternative assets Decision makers at pension and retirement plans show a strong preference for nonmarket-driven strategies and alternatives as ways of both increasing returns and decreasing portfolio risk, according to this survey of investors from around the world. Nearly one-half of respondents see nonmarketdriven strategies and increasing allocations to alternatives as especially effective ways to increase returns in the near term. When asked to choose strategies that would be especially effective in increasing their plans returns over the next 12 months, almost one-half (48%) of respondents select increasing their use of nonmarket-driven strategies, such as absolute-return and inflation-plus instruments, while 46% select increasing allocations to alternative assets. The same selections remain the top two when respondents are asked about especially effective strategies to decrease portfolio risk over the same time period; 52% choose increasing their use of nonmarket-driven strategies, while 33% choose alternative assets (see Figure 3). Figure 3. Alternatives and other nonmarket-driven strategies yield both high returns and lower risk Which of the following would be especially effective ways to increase your plan s returns over the next 12 months? Which of the following would be especially effective ways to decrease your plan s portfolio risk over the next 12 months? Increasing its use of nonmarket-driven strategies (such as absolute-return or inflation-plus instruments) Increasing its allocation to liquid or illiquid alternative assets Allowing a broader range of investment choices (such as high conviction funds, concentration within asset classes, leveraged/gearing funds, shorting, etc.) Other Percentage of respondents 7

8 Respondents enthusiasm for alternative investments reinforces a trend already seen in recent issues of the AMP Capital / Institutional Investor Research Report. Respondents enthusiasm for alternative investments reinforces a trend already seen in recent issues of the. Retirement plans seek to expand their holdings of low-beta assets that yield strong returns. These include alternative assets for example, private equity and real estate which can fall under the umbrella of nonmarket-driven strategies, given the independence of many alternatives from the publicly traded markets. This preference for alternative investments on the part of retirement plan investors stems largely from their continuing concern over achieving acceptable returns while avoiding high market volatility, as seen in the next sections of this report. 8

9 Concerns and allocation responses over the past 12 months When asked to identify their most pressing concerns over the past 12 months, 40% and 32% of respondents select reducing asset correlation and volatility exposure, respectively. In fact, the only concerns topping these two are, as one would expect, increasing returns and reducing overall risk (see Figure 4). As a response to these concerns, retirement plan managers most often report having sought insulation from the publicly traded markets by increasing allocations to alternative assets such as direct real estate and infrastructure, private equity, and hedge funds over the past 12 months. During the same period, fewer respondents report increasing allocations to other asset categories. Respondents most pressing concerns over the past 12 months have been boosting returns and reducing overall risk, asset correlation, and volatility exposure. Figure 4. In response to their concerns, respondents have shifted allocations toward alternatives Which of the following were the greatest concerns over the past 12 months at your retirement plan? As a result, which of the following actions were taken by your plan over the past 12 months? Percentage of respondents 9

10 The more retirement plans use alternatives to step away from the publicly traded markets, the more they avoid volatility and correlation risk while also seeking increased returns. The more pension and retirement plans use alternatives to step away from the publicly traded markets, the more they avoid volatility and correlation risk. At the same time, increasing allocations to alternatives is considered an especially effective way of increasing returns. For these reasons, it appears that decision makers at retirement plans have often put into practice their strong preference for alternatives when they have made actual allocation shifts over the past 12 months. Success or failure? How successful were respondents allocation shifts into alternatives and, less so, into fixed income and equities in addressing their concerns over the past 12 months? All in all, respondents are pleased with the results of their shifts. Nearly three-quarters (74%) say these shifts met or exceeded their expectations (see Figure 5). Figure 5. Almost three-quarters of respondents see their recent asset allocation shifts as meeting or exceeding expectations Over the past 12 months, have the results of your plan s asset allocation shifts generally exceeded, met, or fallen short of your expectations? Percentage of respondents Percentages do not add up to 100% due to rounding 10

11 Concerns and allocation responses over the next 12 months Respondents top concerns going forward are, in fact, the same four that have caused them to lose sleep during the last 12 months, albeit in a different order. For the next 12 months, 46% of respondents cite boosting returns as among their most pressing concerns, while 37% select reducing volatility, 31% select reducing risk overall, and 27% select decreasing asset correlation (see Figure 6). In response to these concerns, more than one-third of respondents (35%) expects their retirement plans to continue to migrate into alternative investments over the next 12 months. Far fewer expect their plans to increase allocations to fixed income and equities. Far more respondents expect to increase allocations to alternatives than to equities or fixed income in the near term. Figure 6. Search for higher returns and lower volatility will continue to drive increased allocations to alternatives in the near term Which of the following are expected to be the greatest concerns over the next 12 months at your retirement plan? As a result, which of the following actions is your plan likely to take over the next 12 months? Percentage of respondents 11

12 In what is still a tepid recovery from the global financial crisis, many fund managers are eager to reduce risk and, as their plans approach fully funded status, to lock in their financial health. In what is still a tepid recovery from the global financial crisis, many fund managers are eager to reduce risk and, as their plans approach fully funded status, to lock in their financial health. This is likely to include immunizing their plans against changes in asset values and interest rates through the use of derivatives, liability-driven investments, alternative investments, and other strategies. Retirement plans need to reduce risk and to increase their access to cash often grows out of the aging of their plan participants. As more of a plan s participants reach retirement age, it must shift into less risky, cash-yielding investments to guarantee its ability to pay progressively more plan benefits. Summarizing the comments of a number of respondents, the CIO of a North American pension plan with US$1 billion 10 billion under management simply cites the need to pay benefits as a main driver of the plan s expected allocation changes over the next 12 months. This process of decreasing risk and increasing liquidity as a retirement plan s funded status improves and its participants retire a major cause of retirement plans allocation changes is often carried out via a glide path, a predetermined, scheduled series of allocation shifts based on the plan s expected needs. One respondent, a managing director at a midsize North American pension, reports that his plan is scheduled to start on its de-risking glide path in the next 12 months. However, the possible motivations for locking in retirement plans long-term financial health vary widely. For example, some decision makers are motivated to do so as part of an effort to terminate a plan by off-loading its entire pension liability to an insurer or insurers. 12

13 Specific asset allocations: Today and tomorrow On average, expect small shifts in asset allocations Today, average asset class allocations at pension funds and other retirement plans are broadly distributed as follows: 46% to equities, 38% to fixed income, 14% to alternatives, and 2% to cash. From here, decision makers at these plans expect to make only small percentage adjustments, on average, over the next 12 months (see Figure 7). Retirement plans currently have, on average, 46% of their portfolios in equities, 38% in fixed income, and 14% in alternatives. Figure 7. Pension and retirement plans do not expect, on average, major shifts in asset class allocations over the next 12 months Please estimate your plan s allocation to each of the following asset classes today and 12 months from now. Average percentage of assets under management Percentages may not add to 100% due to rounding 13

14 On average, no surprising or seismic shift in asset allocations is looming over retirement plans during the next 12 months. The data from this survey show, on average, no surprising or seismic shift in asset allocations looming over retirement plans during the next 12 months, although some plans will, as expected, increase their allocations to certain asset classes at the expense of others. (Of course, a massive average shift of, say, 10 percentage points from one asset class to another across many plans would, in all likelihood, be quite disruptive to asset markets.) This is consistent with the comments by some survey respondents explaining that any 12-month period is too short a time for their plans to initiate and execute dramatic asset allocation changes. One portfolio manager at a Japanese pension handling US$1 billion 10 billion explains, We do not and will not change asset allocations annually. Usually, we change allocations every five years. The CIO of a North American pension of similar size says simply, We tend not to make tactical shifts in asset allocations. 14

15 Many respondents expect shifts out of equities, into alternatives While the average shifts will be small, retirement plans do expect to shift allocations to meet business and operating needs. While the average changes expected across the entire response base are small, individual retirement plans do, of course, expect to shift their allocations to meet their business and operating requirements. The survey data reveal that the pattern of these shifts will be out of equities and into alternative assets (see Figure 8). Across all respondents, 42% expect their plans allocation shifts to yield a net decrease in equity holdings, while only 13% expect a net increase in equities; most of the net equities decline will consist of shifts specifically out of domestic equities. On the other hand, net alternative asset holdings are expected to rise at 35% of respondents plans, while falling at only 4%. Finally, respondents are slightly more likely to anticipate a net increase than a net decrease in fixed income assets. Figure 8. Respondents are most likely to shift out of equities and into alternative assets in the 12 months ahead Respondents expecting to change allocations to individual asset classes Respondents expecting to change net allocations to broad asset categories Percentage of respondents Percentages may not add to 100% due to rounding 15

16 Investor enthusiasm for alternatives stems from a number of factors, including their interest in earning higher returns, meeting cash requirements, and avoiding market volatility. We re transitioning a large portion of our total portfolio into income-generating assets, including more private equity structures and hedge funds. We re attempting to target future negative net cash flows and moving traditional fixed income portfolios into alternative credit portfolios, reports the CIO of a North American pension with US$1 billion 10 billion under management. We re overweighted in equities today because of the recent rally, so we re increasing hedge fund exposure to help us increase expected returns without taking on more equity risk, says a portfolio manager at a midsize pension in the U.S. Portfolio rebalancing will also drive some allocation adjustments out of equities and into alternatives. We re over-weighted in equities today because of the recent rally, so we re increasing hedge fund exposure to help us increase expected returns without taking on more equity risk. But we don t like private equity going forward. It s raised too much money recently, says a portfolio manager at a midsize pension in the U.S. This portfolio manager s view regarding private equity is echoed by the CIO of a North American pension with plans to shift assets within the broad category of alternative investments: At our fund, more private equity commitments will be called, while additional real asset commitments will be made. 16

17 On average, expect small shifts in geographic exposure Decision makers at pension and retirement plans also do not expect to make any dramatic shifts, on average, in their regional exposure over the next 12 months. At present, respondents average geographic exposure is distributed as follows: 41% to the Americas; 39% to Europe, the Middle East, and Africa; and 20% to the Asia-Pacific region (see Figure 9). At present, respondents average geographic exposure is distributed as follows: 41% to the Americas; 39% to Europe, the Middle East, and Africa; and 20% to Asia-Pacific. Figure 9. On average, retirement plans do not expect dramatic shifts in regional exposure over the next 12 months Please estimate your plan s exposure to the following geographic regions both today and 12 months from now. Average percentage of assets under management Respondents comments suggest that, at certain retirement plans, interest in allocating assets geographically may be waning in favor of looking more globally at asset classes and risk. We do not specifically target geography in our asset allocations, says the CIO of one pension in North America with US$1 billion 10 billion under management, while a portfolio analyst at a similar pension explains, We are increasing our allocation to infrastructure, which may change our regional allocations marginally, but at this point it is difficult to forecast. 17

18 How allocation decisions are made at pension and retirement plans Pension and retirement plans internal investment teams initiate significantly more of these plans asset allocation shifts than do other entities, external or internal; according to 44% of respondents, these teams initiate many of their plans allocation shifts. Regulatory changes, third-party investment managers, and plans own boards and sponsoring organizations are far less likely to initiate allocation changes (see Figure 10). Internal investment teams are much more likely to initiate allocation shifts than are regulatory mandates, thirdparty investment managers, and plans own boards and sponsoring organizations. Figure 10. Pension and retirement plans internal investment teams are the principal source of asset allocation changes In the past three years, how often has each entity or factor below initiated a change in your plan s asset allocations? Percentage of respondents Percentages may not add to 100% due to rounding 18

19 Regardless of who calls for a change in allocations, a majority (56%) of respondents says their plans are able to formulate a strategy to execute the change in four months or less. On the fast end of the spectrum, 15% say it takes their plans only two months or less to do so, while, on the slow end, 35% say it takes more than six months (see Figure 11). Figure 11. The majority of respondents plans can formulate strategies to change asset allocations within four months How long does it take your plan both to decide to change asset allocations and to develop the strategy used to implement the change? Percentage of respondents 19

20 Use of external, third-party asset managers Today, pensions and other retirement plans rely on third parties to manage more than half (56%) of their assets, on average. Decision makers at these plans expect this proportion to stay the same during the 12 months ahead. Smaller plans those with less than US$10 billion in assets under management clearly use third-party asset managers to a larger extent, on average, than do their larger peers (see Figure 12). Today, pensions and other retirement plans rely on third parties to manage over half of their assets, on average. Figure 12. Smaller retirement plans are especially likely to use third-party asset managers Please estimate the percentage of your plan s investments managed by external third-party asset managers today. Average percentage of assets under management Survey respondents express confidence in various aspects of their third-party asset managers particularly in their expertise and, for all but the largest retirement plans, in the cost savings these external managers can offer. First, respondents report that the need to gain specific areas of expertise and access that their plans themselves do not have is a frequent reason for using external managers. [We seek] external managers because of their skill sets. Our plan is to bring all publicly traded assets in-house and to manage private assets and alternatives externally, explains the CIO of a DC plan in continental Europe with US$10 billion 50 billion in AUM. A large DC plan in Thailand uses third-party managers to identify alpha-seeking opportunities, according to one of its internal portfolio managers, while, in Japan, another portfolio manager says his pension plan, with only US$1 billion 10 billion, hires external managers to gain overseas expertise and access. 20

21 The prospect of cost savings often drives retirement plans, especially small ones, to embrace third-party asset managers. Second, the prospect of cost savings often drives retirement plans, especially small ones (those with relatively low AUM or small staffs), to embrace third-party asset managers. It is frequently less expensive for small plans to employ external managers than to develop the internal capabilities and infrastructure necessary to manage their own assets. Accessing third-party asset managers lets us reduce costs and focus on our own core competencies, says the CFO at a North American DC plan with less than US$1 billion in AUM. The CIO of a pension with US$1 billion 10 billion, also in North America, is more specific: My staff focuses on strategic planning and risk management, while all implementation is done through outside portfolio managers. Very large pension and retirement plans, on the other hand, can often meet or exceed the economies of scale of third-party asset managers by building their own asset management capabilities in-house. Like other large DB plans, it is generally cost-effective for us to internalize investment management, says one portfolio manager of a U.K. pension with US$ billion under management. And the CIO of a North American DB plan with more than US$100 billion under management reports, we are two years into a six-year plan to grow internal [asset] management. 21

22 Regional findings Regional preferences for increasing returns When asked to choose what they consider to be particularly effective ways to increase returns at their retirement plans over the next 12 months, respondents in different regions reveal different preferences. Asia-Pacific respondents favor increasing their use of nonmarket-driven strategies, such as absolutereturn and inflation-plus instruments. North American respondents prefer increasing allocations to alternatives. Finally, European respondents favor broadening the strategies they typically use to include, for example, high-conviction funds, concentration within asset classes, leveraging/gearing funds, and shorting (see Figure 13). Respondents in North America more so than their counterparts elsewhere prefer alternatives as a means of boosting returns. Figure 13. To increase returns, respondents in North America, Europe, and Asia-Pacific prefer different strategies Which of the following would be especially effective ways to increase your plan s returns over the next 12 months? Average percentage of all respondents and of respondents in each region 22

23 Regional concerns and resulting allocation shifts over the next 12 months Respondents expect the following concerns to be most pressing, region-by-region, for retirement plans over the next 12 months: boosting returns in Asia, decreasing asset correlation in North America, and both boosting returns and decreasing overall risk in Europe. In addition, escaping volatility is considered a pressing concern in all three regions (see Figure 14). Nearly 80% of respondents in Asia-Pacific see the need to boost returns over the next 12 months as their plans most pressing concern. This is also seen as the largest concern by a majority of respondents (57%) in Europe, where fixed income dominates retirement plan portfolios, while only 21% of North American respondents share the same concern. In North America, 38% of respondents consider the need to reduce correlation between asset classes most pressing, compared to 21% in Europe and 14% in Asia-Pacific. Retirement plans expect to shift into equities in Asia-Pacific, into alternatives in North America, and into fixed income in Europe. When asked how their retirement plans are, in general, likely to address these concerns, respondents reveal regional plans to shift asset allocations over the next 12 months that are not surprising that is, shifts that are largely in line with the primary concerns and preferences of each region. In an effort to increase returns, 50% of respondents in Asia-Pacific anticipate increasing their equity allocations, while less than 10% of their peers elsewhere plan to do the same. In an effort to escape volatility and decrease the correlation between assets, a large proportion (42%) of North American respondents plan to invest further in alternative assets, while about 30% of those elsewhere expect to do so. In Europe, a combination of concern over boosting returns and reducing risk, especially exposure to volatility, has driven 36% of respondents to plan on increasing their allocations to fixed income, while 21% of North Americans and only 13% of those in Asia-Pacific plan to do the same. Figure 14. Asia-Pacific and Europe are concerned with increasing returns, while North America is more worried about reducing asset correlation Most pressing concerns for the next 12 months Asia-Pacific #1. Increase returns (79%) #2. Reduce volatility (36%) North America #1. reduce correlation between asset classes (38%) #2. Reduce volatility (33%) Europe #1. Increase returns (57%) #2. Reduce risk (43%) #3. Reduce volatility (43%) Most likely response Increase allocation to equities (50%) Increase allocation to alternative investments (42%) Increase allocation to fixed income (36%) Percentage of respondents in each region 23

24 More specifically, when respondents are asked for the actual percentage allocations they expect to see in their plans portfolios in 12 months, versus today, the data further confirm the same allocation shifts. While the regional trends seem clear, the resulting percentage changes in each region are, on average, single-digit increases and decreases in the four broad asset categories (see Figure 15). Over the next 12 months, the average regional changes to the four broad asset categories are expected to be single-digit increases or decreases. Figure 15. On average, respondents expect to shift into equities in Asia-Pacific, into alternatives in North America, and into fixed income in Europe Please estimate your plan s allocation to each of the following asset classes today and 12 months from now. Total equities Asia-Pacific North America Europe Total fixed income Total alternatives Cash Average percentage of assets under management in each region 24

25 How decisions to change allocations are made in each region While some regional variations exist, the parties or factors responsible for initiating decisions to change asset allocations from both within and outside of retirement plans are most often the plans internal investment teams and changes to governmental regulations, with third-party asset managers also in the mix: In North America and Asia-Pacific, retirement plans internal investment teams most often initiate allocation shifts; in Europe, most shifts are initiated by changing government regulations. In North America, 50% of respondents, the highest proportion in any region, say their internal investment-management teams initiate many of their decisions to shift allocations. This is followed by 15%, also the highest proportion in any region, who report that third-party investment managers initiate such decisions. Only 6% attribute many of these decisions to new government regulations. In Europe, we see the highest proportion (43%) saying that changing requirements of government regulators are the initial drivers of many allocation decisions, followed by nearly 30% saying that many of these changes start with their internal investment teams. In the Asia-Pacific region, 43% of respondents report that their internal investment teams initiate many of the changes to their asset allocations. Government regulation causes many such changes at 21% of the plans in the region, while 14% of regional respondents cite third-party asset managers as the source of many of these changes. 25

26 Conclusion: Improving the allocation decision process at pension and retirement plans When asked how they would most like to improve the way their plans make decisions about changing asset allocations, survey respondents call for increasing the speed and independence (from, for example, a plan s board) with which these decisions are made. Also revealed is the desire to improve the quality of the research on which asset allocation decisions are based. In addition, some respondents voice the need to improve their plans implementation of allocation changes, rather than the decision process itself. Respondents call for increasing the speed with which their plans asset allocation decisions are made. Many respondents expressed the need for their plans to make decisions regarding asset allocation changes more quickly. To this end, a number recommend reviewing allocations continually and more flexibly, rather than being tied to a process dependent on formal meetings or studies: Decisions are made at the staff level regarding asset allocations [at our plan], but all decisions are approved on the board level, and this process is slow and inflexible, says the CIO of a North American pension plan with US$1 billion 10 billion under management. Our investment committee currently meets four times a year, as required by law, so decision making is slow, writes a portfolio analyst at a midsize pension in North America. We should review asset allocations on an ongoing basis and adjust as warranted, as opposed to using a five-year study, says the CIO of a North American pension with US$10 billion 50 billion under management. Respondents also see the need for those making allocation decisions to be more independent from their plans boards and other overseers: We need to establish an investment committee independent of our board of trustees, says a portfolio analyst at an Australian hybrid DB-DC plan with US$1 billion 10 billion under management. Our trustees and investment committee must delegate greater authority to the fiduciary asset manager and in-house investment management team, recommends a portfolio manager at a U.K. pension with US$50 billion 100 billion under management. 26

27 Other respondents would like to see better research go into their plans asset allocation decisions. Other survey respondents express the need to improve the quality of the research inputs used in their plans asset allocation decisions: We need to devote more resources to research and portfolio optimization, observes a portfolio manager, working in Hong Kong/China, of a superannuation fund with more than US$100 billion under management. Improving our bottom-up asset valuation methodologies [would improve how we make decisions about changing allocations], says the CIO of a North American pension plan with US$10 billion 50 billion under management. Finally, some respondents express the need to improve their retirement plans implementation process following a decision to change asset allocations: We need to shorten the implementation time [after deciding to shift asset allocations], states the CIO of a North American pension plan with US$1 billion 10 billion under management. [Our plan requires] increased staffing for implementation, writes the CIO of another North American pension with US$1 billion 10 billion under management. 27

28 Contact information AMP Capital For more information about AMP Capital and its offerings, please visit or contact Adrian Amores at Institutional Investor Research For more information about Institutional Investor Research and its custom research reports, please visit or contact Michele Luthin at Important note: AMP Capital Investors Limited (ABN , AFSL ) and AMP Capital Funds Management Limited (ABN , AFSL ) make no representations or warranties as to the accuracy or completeness of any statement in this document including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. 28

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