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Pensions schemes switch to smart beta

08 July 2014


Likely to continue until investors feel that they are getting their money's worth, according to UBS Global Asset Management

Read more: UBS smart beta fiduciaries equities bonds

Pension scheme demand for alternative beta continues to rise as they seek low-cost solutions without the constraints of traditional passive management, according to UBS Global Asset Management’s study, Pension Fund Indicators 2014.

This trend is likely to continue until investors "feel that they are getting their money's worth", said the report.

"The conversation in the space is at different stages across asset classes. Many investors considering these approaches in equities are considering the use of investment factors or techniques targeting particular outcomes within their portfolios."

"Within bonds, more attention continues to be focussed on how to gain a broad exposure or achieve a particular outcome."

Achieving full funding in a low-yield environment has become the primary concern for many pension scheme trustees.

Allocations to traditional asset classes provide the backbone of many deficit recovery plans. However, some trustees wish to consider investing in a broader range of asset classes, along with the appropriate governance structure, to move schemes closer to full funding.

UK pension funds have significantly cut back their equity exposure in the past decade. The UK's average pension scheme allocation to equities vs. bonds is currently 46% against 35%, compared to 71% in equities and just 20% in bonds in 2001.

Pension funds in Denmark, Japan and the Netherlands have even higher allocations to bonds. Danish pension funds on average allocate 66% to bonds and just 13% to equities.

The report also noted the growing interest in fiduciary management, with assets under management in the UK estimated to be more than £50bn as of 2012.

"With many pension funds expressing an interest we would expect to see this growth continue."

However, some challenges continue to test the effectiveness of fiduciary management in practice. Critics say there is a lack of transparency and accountability in some markets and models.

"[Another] challenge schemes need to address is how to choose the right fiduciary manager, which often starts with accurately defining its goals and expectations."

The report also addressed demographic trends. Japan still stands out as having the biggest problem with its old-age dependency ratio expected to rise to 70% in 2100. In comparison the UK’s old age dependency ratio is around 22% but is expected to escalate to 54% in 2100.

With UK auto enrolment celebrating its first anniversary in 2013, defined contribution (DC) memberships now account for 30% of UK workplace pension memberships, an increase of 3% from the previous year. Globally DC assets have grown at a rate of 8.8% per annum while defined benefit assets have grown at a slower pace of 5.0%.

The US remains the world’s largest pension fund market of any OECD country with assets worth $11.6trn in 2012. However, since 2001 the country's share of this market has fallen as a result of faster growth among pension funds in other OECD countries.


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