Keynote speech for the belgian Association of Corporate Treasurers. ......Portfolio rebalancing will be a key theme in the next year as defined benefit pension fund asset allocations are
quite dislocated from their policy targets. European credit and active equities are well below target and passive
equities above – meaning that an unwinding of these positions will eventually be needed to rebalance to target
allocations.....
1. Pension Plans: Challenges and Responses
Continental European Investment Management 2011
29 September 20111
CONFIDENTIAL
3. Summary of Key Findings
▪ Continental European institutions reported rising asset levels on the back of the rebound in equities; however
they stand well below 2007/8 levels and recent events in global markets and substantial falls in key risk assets
will have been detractive to most portfolios.
▪ In the broad market, international equity allocations have risen on the back of positive markets and now almost
match allocations to domestic equities, which have contracted. Fixed income remains the dominant asset
category and allocations to alternatives remain anemic. A minority of institutions anticipate making significant
asset allocation changes. The weight of responses indicate reductions in European government bonds and
increases in private equity.
▪ The proportion of total assets managed externally has increased meaningfully. Fixed income dominates
externally managed assets, although equities is becoming increasingly important. Of total assets, a higher
proportion of equities is externalized than fixed income. Both equity and fixed income external allocations are
focused on European product except in the case of pension funds, where international equities is dominant.
▪ Defined benefit pension fund asset allocations are quite dislocated from their policy targets. The sovereign debt
crisis has driven a tactical rotation out of passive European government bonds into active product and
international bonds; Meantime, European credit and active equities are well below target and passive equities
above – meaning that an unwinding of these positions will eventually be needed to rebalance to target
allocations.
▪ Large funds have expanded the number of external managers used, diversifying away manager-specific risk
and hiring more specialist firms. In aggregate, however, both manager hiring and solicitation activity has slipped
while forward looking hiring expectations have fallen to a new low characterized by little product focus.
▪ A significant minority of institutions – mostly pension funds – are applying derivatives for the purposes of liability
and risk management. The focus on liabilities is being driven by maturing pension funds, accounting regulations,
and the market environment.
▪ Investment consultant usage has fallen again.
2 CONFIDENTIAL
4. Key issues facing institutional investors
▪ Achieving the target rate-of-return is cited
as the number one concern by many Representative Quotes
institutional investors
•“Capital markets will not generate the fund return demanded
within reasonable risk limits.” –German Corporate Pension
▪ Other key issues include: Fund
•“We need 3.5% performance every year which is a challenge
— Sovereign debt crisis as long as Swiss bonds return only 2%.” –Swiss Insurance
Company
— Risk of inflation
•“Issuer risk [is driving us] away from high-risk Euro-Govies.”
–German Endowment/Foundation
— Interest rate increases
•“The Euro debt crisis is currently our major concern.” –
Belgian Insurance Company
— U.S. deficit
•“[We are] very worried about an interest rate increase.” –
Belgian Corporate Pension Fund
— Japan disaster
•“We want to get out of interest rate guarantees [ ] I am
— Arabian political turmoil deeply worried about high interest rates.” Danish Corporate
Pension Fund
•There are major political issues to worry about, the U.S.
deficit, the Japan disaster, the Arab dictator states etc.” –
Swedish Corporate Pension Fund
Source: Greenwich Associates 2011, CEIMF-11
3 CONFIDENTIAL
5. Key issues facing institutional investors
▪ Regulatory developments are causing Representative Quotes
additional stresses across the region:
• “Increased regulation coming from the central bank [is] putting
pressure on smaller pension funds and making their life difficult to
— Regulations impacting Dutch pension impossible” –Dutch Corporate Pension Fund
funds are widely seen as overly • “[We are experiencing] undue and irresponsible big pressure
restrictive and not in member’s best from the 2 regulators on pension funds.” – Dutch Corporate
interests Pension Fund
• “We have to become so transparent that we have to inform the
— Solvency II implementation regulator beforehand what investments we intend to make. This
is not in the interest of our clients at all.” –Dutch Corporate
Pension Fund
— Basel III and liquidity requirements
• “The restricting regulations imposed on the pension funds created
by the state to contribute to the Swedish general pension system
limits the placement possibilities and thereby makes it difficult to
obtain a satisfactory rate of return.” – Swedish Corporate Pension
Fund
• “Solvency II regulations and at the same time, the bank regulation
Basel III, keeps me up at night.” –Danish Bank
• Basel III regulations and its consequences [are leading to] tighter
liquidity, forced equity increases and more difficult refinancing.” –
German Insurance Company
• “It is unclear at this time what the impact of Basel III will be on the
capital requirements of the bank which could affect substantially
our Depot A.” –German Bank
Source: Greenwich Associates 2011, CEIMF-11
4 CONFIDENTIAL
6. Asset allocation trends
▪ A significant number of institutional
investors are contemplating more active
Representative Quotes
management of their assets in order to
selectively avoid exposure to perceived • “ [We are becoming] more active and less passive because of the
PIIGS problems.” –Norwegian Endowment/Foundation
risk areas.
• “[We are] shifting the government bonds portfolio to low-risk-
government bonds.” –German Corporate Pension Fund
▪ Investors are diversifying out of
government bonds. • “Shift from government bonds to inflation linked corporate
bonds.” –German Corporate Pension Fund
▪ While positioning portfolios to benefit • “There is too much enthusiasm for emerging markets, so we are
liquidating Asia and moving into Global Emerging Markets
from the shifting economic balance including Eastern Europe and Latin America.” –Dutch Insurance
between emerging and developed Company
markets, there is growing concern of a • “We are increasing our investments in Emerging Markets such as
bubble forming. BRIC, but nothing in Africa.” – Swedish Corporate Pension Fund
• “Alternatives are potentially interesting but there is still lack of
▪ Transparency remains a major hurdle to transparency and liquidity in some products.” –Swiss
investing in alternatives. Endowment/Foundation
• “We are short duration, and now contemplating doing a swap or
▪ Use of derivatives for risk management buying put options or even inflation linked bonds.” –Swiss
Corporate Pension Fund
purposes is growing.
Source: Greenwich Associates 2011, CEIMF-11
5 CONFIDENTIAL
7. Institutional assets levels are recovering, but still fall well short of 2007
highs
C.E. Institutional Investors’ Total Institutional Assets 2001 – 2011, by Type of Institution (excluding Banks and Savings Banks)
€ 3,000
€ 2,454
€ 2,500 € 2,305
€ 2,035
€ 1,978
€ 2,000 € 1,885
€ 1,161 € 1,699 € 1,655
Euros (billions)
€ 1,489 € 1,484 € 1,258
€ 939 € 890
€ 1,500 € 778
€ 1,281
€ 1,214
€ 882 € 763
€ 658
€ 736
€ 1,000 € 505
€ 575
€ 100 € 750 € 549
€ 653 € 631 € 491
€ 500 € 371 € 417
€ 490 € 483 € 493
€ 449
€ 412 € 434 € 467
€ 360 € 330 € 309 € 334
€ 192 € 195 € 143 € 217
€0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Corporate Pension Public Pension Corporate Treasury Foundations Insurance
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: C.E. assets shown in billions of Euros. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit and defined
contribution plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations. Banks and Savings Banks not shown as
trend impacted by change in question methodology.
6 CONFIDENTIAL
8. While fixed income continues to dominate, international equity allocations
have grown on the back of positive markets and now almost match
European equity allocations which have contracted
C.E. Institutional Investors Asset Allocation 2011
Allocations to Alternatives have
reduced since 2009 from a low
100% 5.0% base
3.3%
90% 6.6% Real Estate has increased by 7%
6.1%
80%
Proportion of Total C.E. Assets
70% Cash allocations are little changed
60%
50% 60.6%
Fixed income is broadly stable,
40% growing by about 3% since 2009
30%
International Equity allocations
20% have more than doubled since
9.6% 2009
10% European Equity has reduced
10.7% by15% since 2009
0%
2011
European equities International equities Fixed income
Cash Real Estate Alternatives
Other
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit plan assets
together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations.
7 CONFIDENTIAL
9. A minority of institutions anticipate making significant changes to their
overall asset allocation in the next 3 years; weight of responses indicate
reductions in European government bonds and increases in private equity
C.E. Institutional Investors’ 3-Year Allocation Expectations for Institutional Asset Allocation
Significantly Decrease Significantly Increase No Change
179
European Credit Bonds – Active 28 33
International Equities – Active 26 31 147
European Equities – Active 31 29 173
Real Estate 16 28 156
European Government Bonds – Active 48 24 176
Private Equity 2 22 137
International Bonds – Active 14 19 138
Commodities or Natural Resources 1 14 110
Hedge Funds 10 12 144
European Government Bonds – Passive 15 12 129
Cash and Short-Term Investments 28 11 133
European Credit Bonds – Passive 14 10 150
European Equities – Passive 13 9 146
Infrastructure 1 8 105
International Bonds – Passive 2 8 128
International Equities – Passive 5 6 134
Other 4 4 45
European Bonds – Passive 2 4 145
60 50 40 30 20 10 0 10 20 30 40 50 60
Number of C.E. Investors
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Three year outlook.
Results are for corporate and public defined benefit plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations.
8 CONFIDENTIAL
10. Anticipated change levels in Belgium
Belgian Institutional Investors’ 3-Year Allocation Expectations for Institutional Asset Allocation
Significantly Decrease Significantly Increase No Change
3 17
European Credit Bonds – Active 1
3 10
International Equities – Active 5
5 14
European Equities – Active 3
6 13
Real Estate 4
European Government Bonds – Active 3 13
5
11
Private Equity 0 1
International Bonds – Active 1 10
1
Commodities or Natural Resources 0 0 8
Hedge Funds 0 0 8
European Government Bonds – Passive 5 1 10
Cash and Short-Term Investments 5 0 10
European Credit Bonds – Passive 1 0 9
European Equities – Passive 3 1 11
Infrastructure 0 1 7
International Bonds – Passive 0 2 8
International Equities – Passive 1 0 8
Other 0 0 4
European Bonds – Passive 0 0 10
10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10
Number of Belgian Investors
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Three year outlook.
Results are for corporate and public defined benefit plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations.
9 CONFIDENTIAL
11. The trend towards the use of external managers is gathering pace;
Belgian and Norwegian Schemes are least likely to go external
C.E. Institutional Investors’ Assets
Managed Internally versus Externally – C.E. Institutional Investors’ Assets Managed Internally versus Externally 2011, by
Matched Sample Country
Proportion of Total C.E. Assets
10.3%
30.6% 9.5% 27.7% 25.9% 25.0%
49.4% 7.9%
25.8% 26.5% 12.7%
34.1% 41.7%
80.2%
64.3% 61.4% 67.0%
Proportion of Total C.E. Assets
49.7%
10.3% 11.5% 30.6%
18.0% Austria Belgium Denmark Finland France Germany
63.9% 62.0% C.E. Institutional Investors’ Assets Managed Internally versus Externally 2011, by
Country
47.9%
Proportion of Total C.E. Assets
8.6% 10.9%
21.6% 23.3%
22.2% 42.9% 43.0% 17.8%
33.3% 29.3%
6.6%
25.3%
2009 2010 2011 69.2% 71.3%
50.5% 45.1% 47.4%
31.7%
Discretionary Mandate
Pooled or Commingled Funds
Iberia Italy Netherlands Norway Sweden Switzerland
Internally Managed
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit and defined
contribution plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations. Question methodology was changed in
2011 in order to raise the accuracy of responses.
10 CONFIDENTIAL
12. Asset mix of total DB pension assets and externally managed assets; a
higher proportion of equities than fixed income is externalized
C.E. Institutional Investors Defined Benefit Plan Asset Allocation 2011 – Total Mix versus External Mix, by Type of Institution
100% 2.9%
5.0% 4.5% 4.2% 5.5%
3.8%
6.1% 4.6% 5.2%
90% 7.3%
14.9% 8.9% 7.5%
Total Externally Managed C.E. DB Plan Assets
11.1% 24.4%
Proportion of Total C.E. DB Plan Assets or
80% 13.1%
70%
60% 27.9%
42.3% 53.7%
45.6% 54.6% 37.8%
50%
40%
30%
33.6%
22.4%
18.9% 11.2% 13.7% 25.6%
20%
10%
13.3% 15.2% 15.3%
11.6% 8.5% 10.7%
0%
Pension Funds - Pension Funds - Corporate Pensions - Corporate Pensions - Public Pensions - Public Pensions -
Total Mix External Mix Total Mix External Mix Total Mix External Mix
European equities International equities Fixed income Cash Real Estate Alternatives Other
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit plan assets.
Question methodology was changed in 2011 in order to raise the accuracy of responses.
11 CONFIDENTIAL
13. Corporate DB plans’ anticipated asset returns fall short of mean actuarial
earnings rates by 20 basis points
C.E. Corporate Defined Benefit Plans’
Average Actuarial Earnings Return on Plan
C.E. Corporate Defined Benefit Plans’ Anticipated 5-Year Average Return on Plan Assets Assets
9.1%
8.9%
Current
7.5%
Actuarial Earnings Rate of Return
7.1% actuarial
Expected Total Rate of Return
6.9% earnings
6.7%
6.4% rate
6.2%
5.7%5.7% 5.4% 5.5% 5.5%
GAP = -0.2%
3.9% 4.0%
Actual
expected
rate of plan
return
European International Fixed income Real Estate Private Hedge Fund 2009 2010 2011
equities equities Equity
2010 2011
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research. Note: Mean calculation excludes reported answers of "0" and / or
Note: Mean calculation excludes reported answers of "0" and / or "None". "None".
12 CONFIDENTIAL
14. Public DB plans’ anticipated asset returns exceed actuarial rates by 50
basis points
C.E. Public Defined Benefit Plans’ Average
C.E. Public Defined Benefit Plans’ Anticipated 5-Year Average Return on Plan Assets Actuarial Earnings Return on Plan Assets
9.7%10.0%
Actual
Actuarial Earnings Rate of Return
7.3% expected
7.1% 7.1%
Expected Total Rate of Return
6.8% 6.8% rate of plan
6.6% return
6.4%
5.8%
5.1% 5.2%
GAP = 0.5% 4.8%
3.8% 3.9%
Current
actuarial
earnings
rate
European International Fixed income Real Estate Private Hedge Fund 2009 2010 2011
equities equities Equity
2010 2011
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research. Note: Mean calculation excludes reported answers of "0" and / or
Note: Mean calculation excludes reported answers of "0" and / or "None". "None".
13 CONFIDENTIAL
15. DB pension funds will need to unwind passive equity allocations and
increase active equity allocations to reach policy targets
Difference Between C.E. Pension Investors Defined Benefit Plan Asset Allocation and
Target Defined Benefit Plan Asset Allocation 2011
Int'l. Equities – Passive 9.7%
European Gov't. Bonds – Active 5.2%
Int'l. Bonds – Active 3.7%
Alternatives 3.5% Currently Overweight
Real Estate 2.9%
Other 1.7%
European Equities – Passive 1.2%
Int'l. Bonds – Passive 0.2%
Cash -1.2%
European Bonds – Passive -2.3%
Int'l. Equities – Active -3.6%
European Credit Bonds – Passive Currently Underweight -4.4%
European Credit Bonds – Active -5.4%
European Gov't. Bonds – Passive -5.4%
European Equities – Active -5.9%
-15% -10% -5% 0% 5% 10% 15%
Current Allocation Less Target Allocation
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit plan assets.
14 CONFIDENTIAL
16. In line with the lower proportion of assets managed externally Belgian
schemes on average use fewer managers than seen in most markets
C.E. Institutional Investors Average Number of Investment Managers Used, by Country
2011
12
10.6
10.4
10
8.6 8.7 8.7
8.2
Number of Investment Managers
7.8
8
6.6
6.3
6.1
6
4
2
0
Total Austria Belgium France Germany Iberia Italy Netherlands Nordics Switzerland
Institutions
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
15 CONFIDENTIAL
17. Belgian investors’ use of investment consultants is in line with the
corporate and public pension fund averages in Europe.
Belgian Institutional Investors Using
C.E. Institutional Investors Using and Expecting to Hire Investment Consultants for Investment Consultants for Advice on
Advice on Investment Matters 2011, by Type of Institution Investment Matters
60% 60%
50%
50% 50%
13%
5% 43%
Proportion of Belgian Investors
5%
Proportion of C.E. Investors
40% 40%
4%
31% 31%
30% 30%
1%
4%
42% 40% 40%
20% 20%
33% 3%
10% 20% 20% 10%
15%
0% 0%
European Corporate Public Corporate Insurance Banks Savings 2008 2009 2010 2011
Investors - Pensions Pensions Treasury Banks
Total
Now Use 2011 Expect to Hire 2011 Now Use 2011
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: “Now Use” refers to investments used by investors in the past 12 months. “Expect to Hire” refers to expected hiring for investments in the next 12 months.
16 CONFIDENTIAL
18. Average fees paid to external managers have slipped
Average Fees Paid by C.E. Institutional Investors to External Managers
70
60.5
59.3
60
54.1
51.9 51.1
50
44.6 44.9
41.2 41.7
Basis Points
40
35.3
32.5
30.9
30
24.7
22.6 22.5
20
10
NA NA NA
0
All Outside Managers Active European equity Active international Active fixed income Multi-Asset Real estate
equity
2009 2010 2011
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: Shown in basis points. Mean calculation excludes reported answers of "0" and / or "None".
17 CONFIDENTIAL
19. In Summary
▪ Each in their own way, DB pension plans continue to struggle with the challenge of closing funding gaps and
generating returns required to meet future obligations.
▪ As a consequence, pension plan policies are shifting away from the strong de-risking seen in 2009-2010.
International equity allocations have risen and now almost match allocations to domestic equities. Fixed income
remains the dominant asset category and allocations to alternatives remain anemic. Anticipated changes
include reductions in European government bonds and increases in private equity.
▪ Similarly, pension schemes are more willing to see if outsiders can help generate alpha and diversification. The
proportion of total assets managed externally has increased meaningfully. Fixed income dominates externally
managed assets, although equities is becoming increasingly important. Of total assets, a higher proportion of
equities is externalized than fixed income.
▪ Large funds have expanded the number of external managers used, however, on average both manager hiring
and solicitation activity has slipped while forward looking hiring expectations have fallen to a new low.
▪ Portfolio rebalancing will be a key theme in the next year as defined benefit pension fund asset allocations are
quite dislocated from their policy targets. European credit and active equities are well below target and passive
equities above – meaning that an unwinding of these positions will eventually be needed to rebalance to target
allocations.
▪ A significant minority of institutions – mostly pension funds – are applying derivatives for the purposes of liability
and risk management. The focus on liabilities is being driven by maturing pension funds, accounting regulations,
and the market environment.
18 CONFIDENTIAL
20. Methodology
▪ From February to May 2011, Greenwich Associates conducted personal interviews with 418 of 709 of the
largest institutional funds in Continental Europe.
▪ These institutional investors comprise corporate and public pension funds, corporate treasuries, foundations,
insurance companies, and banks with externally managed assets greater than €500 million. In some markets
where the universe of large institutional investors is limited, we conducted supplemental interviews with
institutions with between €250 million and €500 million in externally managed assets.
▪ Senior fund professionals were asked to provide quantitative and qualitative evaluations of their investment
managers, qualitative assessments of those managers soliciting their business, and detailed information on
important market trends.
▪ Overall, 59% of institutions targeted participated in our research. Of the 418 institutions interviewed, 96%
allowed disclosure of participation and 75% allowed attribution of their individual responses.
Research Coverage of C.E. Institutional Investors 2011, Research Coverage of C.E. Institutional Investors 2011,
by Type of Fund by Country
C.E. Institutions
C.E. Institutions
201 Universe 111 102 Universe
171 85 83 82 Interview ed
Interview ed 69
119 106 123 60
90 46 51 48 57 50 40 30
61 41 25
70 40 24 41 30
51 34 23 27 15 19
15 15
Savings
Insurance
Treasury
Corporate
Pension
Banks
Foundations
Iberia
Italy
Switzerland
France
Sweden
Finland
Belgium
Germany &
Netherlands
Denmark
Norway
Pension
Banks
Public
Corp.
Austria
Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.
Note: C.E. assets shown in billions of Euros. C.E. assets are not projected and comprise institutional investors disclosing asset information.
19 CONFIDENTIAL