Decision makers at public and corporate pension schemes share their views on asset allocation, sustainability and risk in their real asset investments.

Pension plans, comprising corporate defined benefit (DB) and defined contribution (DC) plans and government/other public pension schemes (public), accounted for broadly two-fifths of our survey cohort. European plans had the greatest representation among corporate schemes, while North American plans made up almost half of public plans.

North American plans go large

The use of real assets by pension plans was broadly consistent with levels seen in the overall results. But there were notable outliers by pension type and geography. For example, North American pension funds were more likely to favour sizeable allocations to real assets.

North American pension funds were more likely to favour sizeable allocations to real assets

About one-third (32 per cent) of North American-based public plans reported current real assets allocations of 20 per cent or more. This compared to one-fifth of both the overall survey population and the public pension channel that declared allocations of 20 per cent or higher. Meanwhile, almost one-half (46 per cent) of North American DC plans maintained real assets weightings of 20 per cent-plus.

Inflation-linked income is increasingly important

Corporate DB (64 per cent) and public plans (54 per cent) cited diversification as the primary reason for allocating to real assets. For DC plans, however, a need for inflation-linked income was the main driver, picked out by 63 per cent of schemes. Given the current environment, it is no surprise the overall pension fund segment reported a material uptick in inflation-linked income motivations over time, with over half (54 per cent) of all pension funds indicating it was the most important reason for allocating to real assets, up from 35 per cent of schemes three years ago.

What is your primary reason for allocating to Real Assets today? (per cent)

Public plans leading demand

Public plans look set to be the biggest drivers of increased demand for real assets

Public plans look set to be the biggest drivers of increased demand for real assets. Seventy per cent expect to up their allocation to real assets over the next two years versus 57 per cent of DB schemes and 51 per cent of DC plans — by comparison, 64 per cent of the overall survey population expected to add to real assets over the next couple of years. North American public plans showed a particular appetite for the asset class: 76 per cent predicted their real assets exposure will rise in the next two years.

Turning to the relative popularity of different strategies, real estate equity was the preferred approach, as it was with the full survey cohort. Listed property proved especially popular with public plans (36 per cent). Regionally, we saw a skew in real estate equity exposure to North American plans, especially among public and DC plans, which had just over one-half of their portfolios allocated to the strategy.

Do you expect to increase or decrease your allocation to Real Assets over the next 24 months and, if so, by how much? (per cent)

DB and DC plans favour pooled funds

Corporate DB and DC pension funds favoured multi-asset pooled funds as a means of investing in real assets. They reported less demand for direct investment than their public counterparts: over one-half (52 per cent) of public funds preferred direct investment, an approach that resonated most with Asian public plans (61 per cent).

Exploring plans’ attitudes to responsible investment, public schemes (62 per cent) were slightly more likely than corporate DC (58 per cent) and DB (56 per cent) plans to agree with the statement that their organisation has “a responsibility to invest sustainably”. North American plans showed the lowest inclination to responsible investment within the DB and DC channels. However, North American public plans felt more compelled to invest responsibly: almost two-thirds (62 per cent) perceived a duty to follow a sustainable approach, a notably higher proportion than for Asian public plans (48 per cent).

Values and risk underpin move into sustainable real assets

Respondents pointed to alignment with corporate values and board pressure (cited by 63 per cent of corporate DB and DC schemes) and risk management (63 per cent of corporate DB plans and 60 per cent of public plans) as among the main reasons to allocate to sustainable real assets.

ESG and sustainability factors were one of several factors considered when assessing opportunities

For most schemes, ESG factors are not the only variable in real assets investment. In common with our wider survey, broadly one-half of pension plans reported ESG and sustainability factors were among several factors considered when assessing opportunities.

Regional variations were evident, however. One-fifth (20 per cent) of Asian corporate DB plans considered ESG/sustainability the “critical and deciding” factor. At the other end of the spectrum, 23 per cent of North American corporate DC schemes and 16 per cent of North American public plans reported they do not consider ESG factors when allocating to real assets, against just seven per cent of the overall survey cohort.

Which of the following best describes your organisation's approach to ESG/sustainability within Real Assets? (per cent)

Prioritising returns

Our respondents reported a clear preference for strategies that prioritise financial returns while integrating ESG factors

Across all pension fund types, our respondents reported a clear preference for strategies that prioritise financial returns while integrating ESG factors, ranging from 87 per cent for public plans to 80 per cent of corporate DB plans; North American public plans had a particularly strong preference for returns-led approaches (97 per cent). Broadly matching our overall survey findings, strategies with a positive, measurable impact against a specified ESG objective came a distant second in each of our three pension fund categories, finding most notable support among North American corporate DC plans (62 per cent) and European public plans (59 per cent).

In keeping with all investors surveyed, pension funds are not willing to abandon financial goals in the pursuit of responsible investment aims. Almost four-fifths (78 per cent) of corporate DC and public plans deemed proven investment performance to be important when selecting an asset manager for a sustainable real assets mandate; corporate DB plans (85 per cent) placed an even greater emphasis on manager records.

Which of the following are most appealing when investing in sustainable Real Assets? (per cent)

Many North American DC plans are unhappy with manager performance

Satisfaction levels with the performance of managers for sustainable real assets strategies varied between pension fund types. Corporate DB plans (81 per cent) were most satisfied while corporate DC plans (71 per cent) exhibited lower satisfaction levels, with just over one-half (55 per cent) of North American DC plans reporting contentment with manager performance.

As for the appeal of individual sustainable real asset approaches, renewable infrastructure drew the greatest interest. Almost one-half (46 per cent) of public plans anticipate adding to their existing exposure in this area, with interest highest among European (55 per cent) and Asian (52 per cent) public schemes. Elsewhere, 33 per cent of DB schemes and 31 per cent of public plans intend to consolidate their existing exposure to low-carbon, new-build real estate, with demand greatest among Asian DB and public investors.

Corporate DB and DC funds less persuaded by net-zero cause

Corporate DB and DC pension funds reported a lower commitment to net-zero targets

Corporate DB and DC pension funds reported a lower commitment to net-zero targets than our wider survey cohort. Over one-third of DB plans (36 per cent) and just under one-third of DC schemes (31 per cent) have not made a net-zero commitment and have no plans to do so, compared to 24 per cent of the overall survey cohort.

Regionally, 47 per cent of North American and Asian DB plans have made no net-zero commitment and have no intention to do so. Support for net-zero policies was higher among public plans, albeit at lower levels than the broad survey population, with a notable lack of appetite among North American public pension schemes. However, change may be afoot: 43 per cent of North American plans report they are investigating the feasibility of adopting a net-zero policy.

What is your organisation's policy on making a commitment to achieving net zero carbon emissions by 2050 (or another date)? (per cent)

Greenwashing and valuations biggest risks to sustainable investment

Corporate DB and DC plans identified greenwashing as the biggest perceived risk

Finally, looking at the challenges associated with sustainable real assets investment, corporate DB and DC plans identified greenwashing as the biggest perceived risk, with North American and European DB plans most sensitive to this.

For public plans, greenwashing and high valuations carried joint equal risks (50 per cent). European public funds were most concerned by the dangers of overinflated ESG claims.

What do you see as the most material risks to investing in sustainable Real Assets? (per cent)

Download the full study

PDF 3.4 MB 34 pages

The Real Assets Study 2023 provides investor insight on asset allocation, risks and opportunities, and preferred routes to market, as well as a deep dive into attitudes towards sustainable real assets – covering everything from net-zero targets to whether investors see a trade-off between achieving ESG impact and financial returns.

Sign-up to our webcast: Real Assets Study 2023

23 Feb 2023 14:00 GMT 60 minutes

Join members of the Real Assets team as they discuss the findings of the Real Assets Study 2023 and also provide an overview on the macro environment, as well as discussing where they are seeing opportunities. The webcast will be hosted by IPE.

This event qualifies for 60 minutes CPD

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

In Europe this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK Issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helens, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1 Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 27, 101 Collins Street, Melbourne, VIC 3000 Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas LLC ("AIA") is a federally registered investment advisor with the US Securities and Exchange Commission. AIA is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.