Pension Funds Increase Use Of Alternative Investments
Thursday, September 16, 2010

An SEI Quick Poll released on September 13 shows a significant increase in the percentage of pension portfolios investing in alternatives, when compared to the previous two years.

In 2008, 51% of pension executives surveyed in an SEI Quick Poll said their pension portfolio was invested in alternatives. In 2009, that percentage increased to 53%. This year’s poll saw an increase to 65% of the poll participants. Use among pensions with more than USD300m in assets is significantly higher than those with less; 84% compared to 53%, respectively.

Other poll findings include that nearly all pension executives viewed improved funded status as a benchmark more important than increasing absolute returns. Of the major concerns impacting pension executives, more poll respondents (88%) chose managing funded status than any other issue. Additional priorities moving forward included improving funded status, creating a long-term pension strategy, stress-testing the portfolio, increasing due diligence, and defining the role of consultants and investment professionals providing advice to pensions.

“Funding deficiencies are getting the attention of various stakeholders in companies and, as a result, boards and senior management are looking for long-term strategies as this scrutiny continues,” said Jon Waite, Director, Investment Management Advice and Chief Actuary for SEI’s Institutional Group. “A plan’s funded status is the top priority as liabilities are being managed within a larger, organizational, risk management framework. In particular, alternative investments are being integrated into the portfolio as another channel for mitigating overall risk, while providing additional return.”

In addition to the increase in the percentage of pensions using alternatives, poll respondents from larger plans are investing a greater percentage of the portfolio in alternatives. Of those with more than USD300m in assets, more than three-quarters (77%) invest 11% or more in alternatives. By comparison, 42% of pensions with less than USD300m in assets invest 11% or more. Real estate (77%), private equity (54%), funds of hedge funds (47%), and single manager hedge funds (30%) are the most common alternatives being used, according to respondents.

In response to recent economic conditions and changing priorities, some pensions are closed to new entrants and accruals have ended for current participants. According to poll respondents, more than half (53%) of the pension plans are either closed or frozen, approximately a 10% increase compared to a similar survey conducted in August 2009. However, funding deficiency was not the only factor in preventing organizations from terminating their plan. Respondents were asked if their plan were fully funded, would they still look to terminate the plan as soon as possible. Of those that already have frozen their plan, nearly three-quarters (73%) said they would look to terminate the plan. Of those with active plans, 75% said they would not look to terminate it.

The poll was completed by 85 pension executives overseeing assets ranging in size from USD25m to USD10bn. Of the respondents, 36% oversee more than USD300m in assets. None of the respondents were institutional clients of SEI.

SEI is a leading global provider of outsourced asset management, investment processing and investment operations solutions.