DB Schemes Expect Strong Fixed Income Returns

Discover European Pension Fund Investment Trends: NeoXam's Yann Bloch explores ESG challenges and opportunities in pension funds.

Featured in Pensions Expert:

Pension schemes expected fixed income asset classes to top the charts over the next 12 months for investment returns, according to research.

Investment grade debt and private credit are expected to lead the way, according to a survey of 126 defined benefit (DB) schemes by Goldman Sachs Asset Management (GSAM).

The poll, which covered UK and European scheme managers and executives, found that nine in 10 respondents planned to increase or maintain their allocations to these asset classes to take advantage of the expected returns.

Fadi Abuali, chief executive officer at GSAM International, said: “Our survey captures the views of European defined benefit pension funds at a pivotal moment. Many are better funded than they have been for years and optimistic about the investment climate, yet the economic outlook is uncertain, with higher-for-longer rates, divergent growth paths around the world and elevated geopolitical risk.

“The respondents in our survey provide insights into a range of key issues, including the attractiveness of fixed income both public and private, the benefits of incorporating sustainable-investing criteria into investment decisions and the key reasons to outsource portfolio management.” 

The report, published in February, said that Europe’s DB pension funds have emerged from the market turbulence of the past two years with improved funding ratios, providing greater leeway as they plan for the future. It added that two thirds of respondents said their funds were close to 100% funded or in surplus.

Sustainability at the centre

The analysis also highlighted the extent to which sustainable investing has become embedded in European pension funds, with 87% of respondents confirming that it is a critical or important factor in their decision making.

Nearly two third (63%) of respondents allocate more than 10% of their portfolio to dedicated sustainable investing strategies, and 45% allocate more than 20%.

In addition, 84% of respondents said that integrating environmental, social, and governance (ESG) criteria into investment decisions could help reduce long-term risks, and more than half said this approach can generate alpha.

Edith Siermann, chief investment officer and global head of sustainability in fixed income at GSAM, said: “The survey demonstrates how ingrained sustainable investing has become in European pension funds. The variety of motivations for implementing sustainable investing indicates the many purposes it serves and the solid foundation it helps provide for fund portfolios.

“We are encouraged to see respondents’ strong belief that integrating ESG factors into investment decisions can help mitigate long-term risks, as well as the fact that a majority believe this approach can improve performance.”

However, Siermann also highlighted that there was a shortage of “reliable, relevant data” in some areas of the market relating to ESG and sustainability. This was particularly the case in emerging markets and unlisted assets.

Yann Bloch, head of product and pre-sales for Americas at NeoXam, said pension schemes were “heading in the right direction”, but warned that legacy data systems could be hampering efforts to integrate ESG factors and respond to regulatory scrutiny.

“Many firms are still reliant on legacy systems, or have data scattered all across the business in spreadsheets – you’d think that as we are nearing the quarter-mark of the 21st century, people would have learned that this kind of approach is a recipe for disaster,” he said.

“Information becomes incredibly difficult to track down, and what it means is that firms are not efficiently or effectively utilising much of the data that they purchase and consume.

“The tide seems to be turning, however, largely driven by the emphasis put on the importance of transparency and reporting by regulators globally when it comes to ESG investing.”

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