Pensions with Purpose: State Street Reveals Five Ways Pension Funds are Taking Action to Own Better Outcomes for Retirement

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Monday, February 22, 2016 10:29 am EST

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"While there’s no single strategy that will solve the challenges for the entire industry, leading pension funds are employing stronger governance frameworks, more advanced risk management capabilities and a more diverse and specialized talent pool to meet long-term objectives."

BOSTON--(BUSINESS WIRE)--Pension funds’ mission to deliver optimal outcomes over the long term continues to be tested by historically low interest rates, booming populations and increased life expectancies, and unprecedented market volatility. New research released today by State Street Corporation (NYSE:STT), Pensions with Purpose: Meeting the Retirement Challenge, finds funds are taking action in governance, efficiency, long-term investing, risk management and talent development to ensure successful outcomes for retirement plan participants over the next three years.

“As a result of the difficult economic environment and shifting demographics, the most innovative pension funds are proceeding with confidence in tackling the retirement challenge,” said Martin J. Sullivan, head of Asset Owner sector solutions for North America, State Street Corporation. “While there’s no single strategy that will solve the challenges for the entire industry, leading pension funds are employing stronger governance frameworks, more advanced risk management capabilities and a more diverse and specialized talent pool to meet long-term objectives.”

Based on responses from 400 pension professionals in 20 countries over a period of two months, the survey found that pension funds will look to “own” five strategic retirement aspects:

Own the Outcome: Board training and education will be the focus of 2016

  • Funds believe that board expertise is not strong enough in critical areas and must be improved. Only 32% rate as “very strong” their board’s ability to think beyond short-term issues to address longer-term, strategic factors affecting the portfolio. Additionally, only 36% rate as “very strong” their board’s understanding of the risks facing the retirement fund, and 38% believe their board has a high level of general investment literacy.
  • As a result, 92% of funds are planning to upgrade their governance model over the next 12 months and roughly half (45%) are planning to increase training and education opportunities for board members. As funds make these changes, the right balance of responsibilities must be set between the board, management and investment teams.

Own the Future: Funds are transforming to meet future obligations, with a focus on ESG and alternatives

  • In an effort to gain returns, funds will continue to diversify investment strategies. 83% expressed moderate or high interest in environmental, social and governance (ESG) investments. Of those interested in ESG, 80% of respondents in North America and 78% of respondents in EMEA say they are more likely to appoint a manager with ESG capabilities.
  • Alternatives are seen as key to boosting returns. Fund of hedge funds and real estate emerged as favorites, with 51% and 50% of funds planning to increase investments, respectively. Yet 46% say they lack transparency on the risks stemming from alternatives.

Own the Efficiency: Under pressure to cost cut, pension funds turn to asset pooling

  • Six-in-ten funds feel pressure to reduce costs and 80% plan to merge retirement plans to boost efficiency and oversight. Most of the funds cited benefits for consolidation including reduced costs (24%), improved operational effectiveness (22%) and high standards and consistency of governance (18%).
  • Pooling funds can create scale to access previously inaccessible assets, enables standardized approaches to governance and creates more room for process efficiency gains through better use of technology.

Own the Risk: Pension plans face stark choices around risk

  • Risk appetite is essentially split down the middle, with 36% of pensions saying they are ready to take on more risk, while 45% are actively looking for ways to decrease the amount of risk in their portfolios.
  • No more than 20% of funds rate themselves as highly effective at managing key risk areas, including investment and liquidity risk.

Own the Talent: The insourcing continues, but external advisors are still vital to success

  • Funds are ramping up their internal specialist talent, with nearly half planning to increase their internal risk teams (48%) and investment teams (45%) over the next three years, particularly as they gear up for increased ESG investing.
  • However, funds will remain reliant on external partners with 65% of all funds agreeing that their consultants are essential to guiding their investment process.

“As life expectancies around the world continue to rise dramatically, there is increased strain on retirement infrastructure,” said Rob Baillie, head of State Street Canada. “The ultimate mission of the global pension industry is to deliver the best outcomes for savers over the long term. Although that mission is getting harder, our research shows that pension funds recognize the need to pursue fresh strategies and are focused on renewing their purpose of owning the future of retirement.”

The pension industry faces immense challenges in its mission to deliver the best retirement outcomes for citizens, amid vast demographic change and rising dependency ratios. State Street has developed an interactive infographic that demonstrates the distance between retirement and savings. Click here to view the tool and download the full report.

About the Research

On behalf of State Street, Longitude Research, a global research firm, conducted the survey of institutional asset owners in October and November of 2015. The survey garnered 400 responses from pension fund professionals, spanning both defined contribution and defined benefit assets across 20 countries. Over half (68 percent) of respondents came from private sector pension systems, 25 percent from public sector pension funds and 7 percent from superannuation funds.

About State Street Corporation

State Street Corporation (NYSE: STT) is one of the world's leading providers of financial services to institutional investors, including investment servicing, investment management and investment research and trading. With $28 trillion in assets under custody and administration and $2 trillion* in assets under management as of December 31, 2015, State Street operates in more than 100 geographic markets worldwide, including the US, Canada, Europe, the Middle East and Asia. For more information, visit State Street’s website at www.statestreet.com.

*Assets under management were $2 trillion as of December 31, 2015. Assets under management include approximately $22 billion as of December 31, 2015, for which State Street Global Markets, LLC, an affiliate of SSGA, serves as the distribution agent.

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