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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
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
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
"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
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
"[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