12.16.2011

Pensions Won’t Go Cheap

12.16.2011
Terry Flanagan

Pensions may be having an ominous year next year, but some players refuse to cut back.

The long-only oriented nature of the U.S. pension model may be changing, thanks to recent market volatility. Like most participants, an “adapt or die” attitude is critical for success in today’s investing environment. Diversifying one’s portfolio and employing sound governance can drive success, noted John Crocker, chief executive of Canadian pension Healthcare of Ontario Pension Plan (HOOPP).

“Efforts should be made to improve workplace pension plans, boosting the number of defined benefit plans, rather than focusing on introducing cheaper alternatives,” Crocker said. “With good governance, professional investors, a sound investment strategy, and mandatory contributions by members and employers, you can get there.”

HOOPP is a fully funded pension, which is a rare find in the industry today. The firm is most known for adapting a proprietary asset allocation model that includes derivatives and other non-traditional components to the standard pension array of investments.

Exercising ‘prudent stewardship’ will also be a trend among pensions for 2012, said institutional consultancy, Mercer.

The firm also observed that pensions need not to be too concerned over volatility, but rather, ensure themselves against “fundamental risk,” or risk of permanent loss of capital.

“‘Point’ estimates of returns should not drive decisions but an understanding of the potential distribution of future returns,” noted a Mercer spokesperson. Such a trend has been development amongst all types of fund managers to focus on absolute return, over relative return.

Yet, the pendulum between staying liquid in investments to preserve liquidity, and long-term alpha generation and diversification is in full swing.

According to an industry report produced by Celent, a research group, pensions now have a lower tolerance for risk, thus leading them to increase their buffers of liquid investments—and for some institutions, “shunning illiquid investments altogether and reduce the capital allocated to risky and volatile assets.”

However, some of the largest industry movers, such as the reportedly largest U.S pension, the California Public Employees’ Retirement System (CalPERS). According to The Wall Street Journal, the firm recently made a very large east coast infrastructure investment: a stake in a New Jersey-New York power line, the Neptune Regional Transmission System from energy investment firm Arclight Capital.

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