Oct 20, 2021
Our new survey of Defined Benefit schemes focuses on the long-term goals of these schemes, and explores the various paths that are available to them as they approach their endgames.
While liability-driven investing (LDI) is heavily in use, schemes—especially those with adequate funding status—are turning to cashflow driven investment (CDI) strategies to manage cash needs.
Source: State Street Global Advisors. Respondents asked to answer "Do you expect to increase your allocations to either of the following strategies over the next three years?"
have not yet allocated to CDI or have implemented CDI in the last 2 years.
of schemes seeking to transfer assets and liabilities intend to allocate more to CDI in the next 3 years.
Our findings show that lower-funded, weaker-covenant schemes are more prominently seeking to transfer their assets and liabilities over the long term, though their weak funding status may make it difficult to do so.
Source: State Street Global Advisors. Respondents asked to choose one goal. For weak/neutral covenant firms, N=62. For strong covenant firms, N=38.
of all respondents say that the strength of the employee covenant is Very Weak or Somewhat Weak.
of weak-funded (<90%) firms say that the strength of the employee covenant is Very Weak or Somewhat Weak.
of weak-funded (<90%) firms say that their long-term goal is to transfer assets/liabilities.
Schemes, even those with longer endgame horizons, are somewhat lukewarm on the inclusion of illiquid assets in CDI strategies. Our survey moreover unveiled that illiquid asset appetite relates to funding status and current fiduciary responsibility.
Source: State Street Global Advisors. Question asked was: "We would be comfortable with the inclusion of illiquid credit assets in a CDI solution," and percentages reflect those answering "Somewhat/Strongly agree." For horizon of 10+ years, N=63; for horizon of <10 years, N=37.
of schemes are comfortable with the inclusion of illiquid assets in CDI.
of fully-funded/surplus-funded schemes either Strongly Agree or Somewhat Agree with the inclusion of illiquid assets in CDI.
of schemes outsourcing fiduciary responsibility Strongly Agree with the inclusion of illiquid assets.
Schemes are driven to outsource fiduciary responsibilities by a wide range of challenges in the DB space, including governance shortcomings and rising demand for environmental, social and governance (ESG) integration.
Source: State Street Global Advisors. Question asked was: "What are the main reasons why your organisation is considering – or has already undertaken – the outsourcing of fiduciary management to a third-party provider?" For weak funded schemes, N=30; For well funded schemes, N=23; For Fully funded/surplus schemes, N=20.
of schemes currently outsource fiduciary responsibility.
of Fully funded/ surplus-funded schemes say that ESG support is a key driver of outsourcing.
State Street conducted a survey of 100 institutional investors in the United Kingdom and Ireland in July 2021. The survey respondents included pension staff, investment professionals, and finance/treasury team members from schemes across a broad swath of industries.
The UK has made great progress to overcome the COVID-19 pandemic, but the fight is far from over. Effective vaccines have given hope just as mutant strains present new challenges.
There are several advantages to diversifying the source of leverage in an investment portfolio beyond just LDI into equities. These include maintaining broadly the same growth asset exposure and hence expected return, whilst freeing up capital to be deployed elsewhere; potentially lowering transaction costs associated with growth in terms of rebalancing back to strategic asset allocation weights; diversifying markets from where leverage is taken, thereby potentially reducing funding costs; potential for fewer capital calls and distributions resulting from lower leverage taken in matching portfolios, augmented by low correlations between equity and matching assets.
As schemes mature, the accuracy and efficiency of an LDI portfolio become increasingly important. It is, therefore, vital that schemes do not feel limited to the LDI solution and service provided by their incumbent manager. There is often apprehension about the perceived complexity of changing an LDI manager, and we seek to address some of these concerns, for both pooled and segregated mandates.