Pension schemes in focus

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Aviva Investors Real Assets Study 2023

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.

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.

Public plans leading demand

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.

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.

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.

Prioritising returns

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.

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 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.

Greenwashing and valuations biggest risks to sustainable investment

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.