The core challenge for pension investors is to rebuild funding levels against a backdrop of insipid growth, an extended period of lower yields, muted return expectations and reduced cash funding from sponsors.
The team’s research addresses the key funding challenges faced by pension funds via four main investment themes:
|Investment returns are likely to play a key role in rebuilding funding levels. Potential solutions include using active management, leverage, illiquidity premia and systematic/smart beta techniques.||Rules/trigger-based approaches may not be the best solution to today’s funding challenges. Potential solutions include the reintroduction of greater discretion in managing multi-asset portfolios and glidepaths, and the recognition that liability-based investing needs to be dynamic rather than “set and forget”.||The end game for most pension funds will be run-off/self-sufficiency rather than buyout, and this will require a portfolio of cashflow generative assets. It takes time to build a cashflow generative portfolio given the illiquid and long-term nature of these assets, so investor should start the planning process as early.||The habit of dividing assets a priori into “matching” and “growth” assets (which is increasingly the case as pension funds de-risk) drives portfolios towards a barbell structure. However, this approach lacks robustness, and is more exposed during bouts of volatility. A more holistic approach may be more appropriate.|
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