• Real Assets
  • ESG
  • Pensions

Conference calls: a snapshot of investors’ views on the big issues

Attendees at Aviva Investors’ annual institutional investor conference gave their take on some of the key themes impacting pensions schemes, from ESG to asset allocation shifts.

3 minute read

hands up

The results from a series of informal polls conducted at Aviva Investors’ recent UK institutional investor conference, 'Adapting to thrive – inspiring future outcomes’, highlighted several trends extending to the broader pensions industry.

Mirroring policymakers, including the Department for Work and Pensions (DWP), attendees recognised that environmental, social and governance (ESG) considerations materially contribute to risk-adjusted returns. The adoption of behavioural finance, however, received mixed results, with nearly half of the respondents seeing it more as a buzzword than a concept to apply to their investment process.

Defined benefit pension schemes are maturing, and most respondents indicated they were currently targeting self-sufficiency over a buy-out as their ultimate objective. In defined contribution, concerns revolved around the need for a smoother connection between the accumulation and decumulation phases for members. ESG and the use of real assets in investment strategies also featured. In total, around 50 pension fund executives, trustees and consultants who collectively are responsible for £360 billion in assets participated in the polls.

ESG duties

graph-1

Nearly 40 per cent of the attendees see risk mitigation as the main benefit of ESG integration, while about a third saw enhanced investment performance as its main benefit. Steve Waygood, chief responsible investment officer at Aviva Investors, couldn’t agree more. For him, “it is all about enhancing investment returns, by managing risk”.

This is in line with recent conclusions from the DWP, which issued new guidance in September to clarify and strengthen trustees’ duties in considering ESG risks in the investment process. Globally, the International Organisation of Securities Commissions is considering how securities regulators can encourage sustainable investments, while the Financial Stability Board is working on improving corporate disclosures of climate-related financial information to support ESG integration.

Regulators have an interest in ensuring the financial services system can withstand all forms of risk, including ESG. But they’re also responding to increasing investor pressure, demanding that sustainability be better integrated into investments. According to Waygood, responsible investing is about shaping the future that pension scheme members really want to retire into.

Beyond the behavioural buzzword

graph-2

Behavioural finance is the latest buzzword and has little impact on schemes’ investment process, according to 44 per cent of the attendees. This result may be surprising to some, given the steady rise to prominence of behavioural science in the past decade, according to Greg Davies, head of behavioural science at Oxford Risk.

In a separate question, however, 67 per cent of the audience agreed that that they are “already consciously applying behavioural finance in practice”. Taken together, these two figures imply some schemes that are applying behavioural finance may not be doing so effectively. This is not surprising: human behaviour is complex, and applying behavioural finance effectively is not simply a matter of running through long lists of biases.

So how can behavioural science move beyond the confines of a buzzword and be a key part of the decision-making process? It is worth recognising that most people essentially face a trade-off between the right thing to do and the comfortable thing to do, Davies said. Investors possess powerful mechanisms geared towards what makes them emotionally comfortable, leading to the tendency to see things through a biased, narrow lens, and potentially bad decisions. Davies argued using a combination of data science, technology and behavioural design can lead to better decisions.

End game

graph-3

Two-thirds of the attendees said their defined benefit (DB) schemes’ ultimate objective is self-sufficiency. The definition varies among schemes but generally involves a modest premium over the cost of funding liabilities with low risk assets such as government bonds. Under self-sufficiency, the pension liabilities remain on the sponsor’s balance sheet, but the pension scheme’s reliance on the sponsor is greatly reduced. A sixth of the respondents are going a step further and targeting buy-out, which removes defined benefit pension liabilities from the company balance sheet altogether. Another 16 per cent haven’t decided what their schemes’ ultimate objectives are, while three per cent chose pension consolidation.

The poll results are skewed towards self-sufficiency, which isn’t fully reflective of the broader pension industry, according to Boris Mikhailov, investment strategist at Aviva Investors. In Mercer’s 2018 European Asset Allocation Survey, for example, only 38 per cent of UK DB schemes are targeting self-sufficiency. The difference may be due to the Mercer survey covering a much larger sample across different size schemes. In contrast, those who attended Aviva Investors’ conference tended to be larger schemes with in-house resources to cater for targeting self-sufficiency. Another reason is that some of the schemes in attendance may simply be too big to do a full buy-out, which has higher expected costs than targeting self-sufficiency, Mikhailov added.

DB for DC

graph-4

Defined contribution (DC) pension schemes are growing faster than DB, and improving outcomes for members is a key priority for sponsors. Among the participants at the conference, 41 per cent said the biggest change to DC investments over the next three years will be a single accumulation and decumulation solution.

The poll results highlighted a need for an investment platform that spans the whole lifetime of DC savers, said John Dewey, head of investment solutions at Aviva Investors. Traditionally, DC members would build their pension pot in the accumulation phase, then separately go through a decumulation stage in which they decide how to take the benefits, typically including an annuity purchase. A platform that can connect the two may bring about more benefits, particularly if this process can integrate each member’s unique needs and apply them to the right investment strategy to deliver outcomes.    

To further extract efficiency, key themes that are prevalent in DB pensions also can be applied to DC. Conference attendees highlighted two ways to do this: default investment options reflecting investor ESG preferences and improving returns and diversification through allocations to real assets each received 28 per cent of the vote. In the later stages, for example, assets such as private credit may help to deliver predictable income in the decumulation phase in DB, just as they do for mature DB schemes. Best practices in DB can be used with similar positive effects within DC.

Author

Related views

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.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

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, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. 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: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

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 based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas 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.